UPA Budget, Can It Save PM’S Sinking Boat?
Coming in the crossfire between poverty-stricken Maoist insurgents and the propagators of crony capitalism, Finance Minister Pranab Mukherjee had to do a balancing act in the Union Budget 2011-12 and he exactly did that on Monday to give a lease of life to scam-tainted UPA-II.
The dire desperation for the Congress & Co to win assembly elections in as many states as possible and the move to combat the rising inflation, forced Mukherjee to prepare a budget that could benefit a larger section of the society and spur growth in the longer term. The move to boost agriculture, infrastructure and social spending is a step in this direction. In all the Finance Minister has allocated Rs 1,60,887 crore for the social sector.
The Union Budget is always a complex subject but this one assumes significance as India is at the threshold of global economic recovery. And at the same time it is facing challenges of maintaining high growth momentum to bring fiscal discipline and to tame the demon in the form of inflation.
Finance Minister’s budget speech might have sounded more pro-poor, but it reiterates the government’s commitment to implement tax reforms that is Direct Taxes Code from April 01, 2012, rolling out of the Goods and Services Tax, reviewing of foreign direct investment policy, which are among the big changes in the offing.
Analysts are divided in their opinion but many have given a thumbs up to the Finance Minister for this tight rope walk.
According to Tata Steel managing director HM Nerulkar this budget is balanced but non-disruptive one. He feels that the Finance Minister is continuing with the policies of inclusive growth but endeavouring to maintain robust economic growth and steady fiscal consolidation by focussing on economic inclusion, liberalising FDI policy and boosting investment in infrastructure, agriculture and social sectors.
“The government’s target GDP growth rate of 9 per cent and commitment to bring down fiscal deficit to 4.6 per cent of GDP for FY 2011-12 and 3.5 per cent of GDP by FY 2014 are statements that hold a lot of promise,” Nerulkar said.
“There has been a positive change in the quantum of fiscal deficit for FY 2010-11 which was at 5.1 per cent of GDP against the previous budget estimate of 5.5 per cent. The FM affirmed his resolve to introduce DTC from April 01, 2012. However as regards GST, the rollout including constitutional amendment is still in progress,” he added.
“Finance Minister Pranab Mukherji presented balanced budget this year. Education sector got good allocations with a raise of 24 per cent to Rs 52,057 crore, over the last year. This is a positive sign in education sector. Even though focus was much on agriculture and infrastructure sectors, education sector has got a fair share in the union budget. Allocation of Rs, 21,000 crore for Sarvashiksha Abhiyan is commendable whose maximum raise is compared to last year. Budget has also recognised universities and the institutes of excellence in the academic field. This is indeed a great encouragement for them to continuously innovate and update their facilities.”
Prof KV Iyer
Dean, United World School of Business, Hyderabad
PGDBA, IIM, Ahmedabad
According to analysts the personal income tax exemption limit should have been increased more than the granted limit of Rs 1,80,000 to enable taxpayers handle effects of inflation better. The interest subvention of 1 per cent on housing loan and enhancing housing loan limit to Rs 25 lakh for dwelling units under priority sector lending are positives.
An increase of 23.3 per cent over last year for infrastructure allocation, policy for development of PPP projects, increasing FII limits for investments in corporate bonds by US$ 20 billion to US$ 40 billion, and proposed issue of tax-free bonds of Rs 30,000 crore will help in the process of capital formation and infrastructure development necessary to sustain the economic growth of the country.
“The Finance Minister (FM) presented the Union Budget amidst scepticism over the growth agenda of the government. It is, therefore, indeed heartening to see the FM devote a good portion of his Budget speech to making a commitment to implement the pending reform initiatives.
The FM did well to commit that the financial sector reforms will be taken to their logical conclusion during this session of the Parliament. He assured the tabling of the provisions for the introduction of the Additional Banking Licences to Corporates during this session. He has also assured the tabling of the long-pending Companies Billing this session of the Parliament. The proposal to permit FDI in mutual funds is a big ticket reform and can be the response to the decline in the growth of FDI in the recent past.
The proposals to simplify the refund of Service Tax is very welcome given that huge refunds have been stuck up in procedural delays. The reiteration of the government to GST is also welcome. Of course, the tabling of Constitution Amendment Bill is just a step in this direction and buy-in of the states will be needed to implement this.
The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. This is advancing the negative impact of the Direct Taxes Code and should have been avoided.
The reduction of tax on foreign dividends received from subsidiaries of Indian companies is a welcome step facilitating eventual imposition of CFC regime. The marginal relief provided to individual tax-payers is also welcome.
The proposal for infrastructure bonds of Rs 30,000 crore and the additional tax incentive to subscribers up to Rs 20,000 is a step in the right direction but a lot more needs to be done if this sector is to develop a thrust.”
Deputy CEO and Chairman Tax, KPMG
The continuation of the disinvestment policy with a target of Rs 40,000 crore in FY 12 is a welcome step to unlock much needed resources for social uplift.
Funds provided for capitalisation of PSU banks, regional rural banks and NABARD are also positive measures to ensure financial robustness of these banks and encourage financial inclusion.
The larger allocations for social sector by 17 per cent and education by 24 per cent are also positive steps but execution of the policies is crucial for their success.
The budget’s concern for environment in the form of national mission for hybrid and electric vehicles, allocations for Green India Mission, Environmental Remediation Programmes indicate the government’s commitment to addressing environmental challenges facing the country.
Sajjan Jindal, Vice Chairman & Managing Director of JSW Steel, believes that the Finance Minister by forming a task force of Group of Ministers to address the issues of corruption, state funding of elections, transparency in public procurement and contracts indicates his courage to tackle the root cause of the malaise of black money.
But it is another thing whether these are only gestures to silence the opposition that has unleashed a war on black money stashed in foreign banks by fat cats believed to be close to Congress.
UNION BUDGET 2011-12 HIGHLIGHTS
■ Critical institutional reforms set pace for double-digit growth.
■ Scaled up flow of resources infuses dynamism in rural economy.
■ GDP estimated to have grown at 8.6 per cent in 2010-11.
■ Exports grown by 9.6 per cent, imports by 17.6 per cent in April-January 2010-11 over corresponding period last year.
■ Indian economy expected to grow at 9 per cent in 2011-12.
■ Five-fold strategy to deal with black money. Group of Ministers to suggest ways for tackling corruption.
■ Public Debt Management Agency of India Bill to come up next financial year.
■ Direct Tax Code (DTC) to be effective from April 01, 2012.
■ Phased move towards direct transfer cash subsidy to BPL people for better delivery of kerosene, LPG and fertilizer mooted.
■ Rs 40,000 crore to be raised through disinvestment in 2011-12.
■ FDI policy to be liberalized further.
■ SEBI registered mutual funds permitted to accept subscription from foreign investors who meet KYC requirement.
■ FII limit for investment in corporate bonds in infrastructure sector raised.
■ Additional banking license to private sector players proposed.
■ Rs 6000 crore to be provided in 2011-12 for maintaining minimum Tier I Capital to Risk Weighted Asset Ratio (CRAR) of 8 per cent in public sector banks.
■ Rs 500 crore to be provided to regional rural banks to maintain 9 per cent CRAR.
■ India Microfinance Equity Fund of Rs 100 crore to be created by SIDBI.
■ Rs 500 crore Women SHG Development Fund to be created.
■ Micro Small and Medium Enterprises MSME gets boost as Rs 5000 crore provided to SIDBI and Rs 3000 crore to NABARD.
■ Existing housing loan limit enhanced to Rs 25 lakh for dwelling units.
■ Provision under Rural housing Fund enhanced to Rs 3000 crore.
■ Allocation under Rashtirya Krishi Vikas yojna (RKVY) increased to Rs 7860 crore.
■ Allocation of Rs 300 crore to promote 60000 pulses villages in rainfed areas.
■ Rs 300 crore vegetable initiative to achieve competitive prices.
■ Rs 300 crore to promote higher production of nutri-cereals.
■ Rs 300 crore to promote animal based protein.
■ Rs 300 crore Accelerated Fodder Development Programme to benefit farmers in 25000 villages.
■ Credit flow to farmers raised from Rs 3,75,000 crore to Rs 4,75,000 crore.
■ Rs 10,000 crore for NABARD’s Short Term Rural Credit Fund for 2011-12.
■ 15 more mega food parks during 2011-12.
■ National food security bill to be introduced this year.
■ Capital investment in storage capacity to be eligible for viability gap funding.
■ 23.3 per cent increase in allocation for infrastructure.
■ Tax-free bonds of Rs 30,000 crore proposed by government undertakings.
■ Environmental concerns relating to infrastructure projects to be considered by Group of Ministers.
■ National Mission for Hybrid and Electric Vehicles to be launched.
■ 7 Mega clusters for leather products to be set up.
■ Allocation for social sector increased by 17 per cent amounting to 36.4 per cent of total plan allocation.
■ Bharat Nirman allocation increased by Rs 10,000 crore.
■ Rural broadband connectivity to all 2.5 lakh panchayats in three years.
■ Bill to amend Indian Stamp Act to introduce. Rs 300 crore scheme for modernization stamp and registration administration.
■ Significant increase in remuneration of Angawadi workers and helpers.
■ Allocation for education increased by 24 per cent. Rs 21,000 crore allocated for Sarv Shikshya Abhiyan registering an increase of 40 per cent.
■ 1500 institute of higher learning to be connected by March 2012 with Knowledge Knowledge Network.
■ National Innovation Council set up. Additional Rs 500 crore for National Skill Development Fund.
■ Plan allocation for health stepped up by 20 per cent.
■ Indira Gandhi National Old Age Pension Scheme liberalized further.
■ Rs 200 crore for Green India Mission.
■ Rs 200 crore for cleaning of rivers.
■ Rs 8000 crore provided for development needs of J&K.
■ 10 lakhs Aadhaar(UID) numbers to be generated everyday from 1st October.
■ Fiscal deficit kept at 4.6 per cent of GDP for 2011-12.
■ Income Tax exemption limit for general category in individual tax payers enhanced from Rs 1,60,000 to Rs 1,80,000.
■ Qualifying age for senior citizens lowered to 60; senior citizen above 80 year to get Rs 5,00,000 IT exemption.
■ Surcharge on corporate lowered to 5 per cent.
“The general direction of the budget is good. The government’s move towards a direct transfer of cash subsidy to people living below the poverty line on kerosene and fertilizer will pave the way for a new era in governance,” said Jindal. But not everyone is pleased. “I am a proud Hindu and am merely borrowing an unfortunately popular phrase, when I say 9 per cent is the new ‘no effort’ growth rate. Indeed 8-9 per cent is not small but in our current context it is way below our potential and need,” pronounced Vallabh Bhanshali, Chairman, ENAM group and one of India’s top investment bankers.
“It is not only up to our senior minister and one annual exercise but the whole government to seize this opportunity and make it ‘good politics’ and not be buckled down by ‘convenient politics’. Maybe, diesel price revisions and more opening of the economy are on the cards after ‘inconvenient’ elections are out of the way in a few months—if the ‘deficit’ numbers are to believed,” Bhanshali added.
The Janata Dal (U) believes that the budget is focussed more on the growth and development of the corporate sector than the common people.
WHERE IS THE COMMON MAN, MR FINANCE MINISTER?
The Finance Minister has wholly focused on economic growth in the budget. He has resolved to simplify the Income Tax, and Excise and Custom Duty laws. He is plodding the states to move to a single rate of VAT and to remove the Central Sales Tax. It is hoped that these measures will help raise our growth rates. The main task before the government, it is believed, is to make the country prosperous. Distribution will happen slowly on its own. This prosperity will come by proper allocation of resources through free run of the market. Say call centrEs are able to pay higher price for electricity because they are making huge profits. The slum-dwellers can pay less. The market will provide more electricity to the call centres and lead to higher rate of growth. The benefits of the call centres will percolate to the slum-dwellers in due course. The government should not interfere with the market so that resources are allocated to those that produce more wealth. It is seen that poor villagers settle in the slums of Delhi and Mumbai and enjoy facilities such as tube light, refrigerators and TVs. The government should let such percolation happen on its own.
Such a happy outcome is not necessary though. Percolation may be a mere trickle. Industries can use capital-intensive equipments and reduce the demand for the services provided by the poor. The call centre, for example, can use vacuum cleaners and automatic tea-making machines leading to less demand for janitors and street-corner tea suppliers. Second, free run of the market leads to equal encouragement to the consumption of ‘good’ and ‘bad’ items alike. Healthy products like Chyavanprash and harmful products like bottled soft drinks are taxed equally. The welfare of the people can be reduced by uninformed consumption of bad products.
Third, advertisements can be used to spin the minds of the people and get them to consume harmful products like X-rated movies and bottled soft drinks. Fourth, the market has no mechanism to deal with mental anguish arising from increasing inequality. A village lad may be happy in an urban slum with his TV but he can yet be much agitated seeing the rich pass by in their air-conditioned cars. This leads to more violence. For these reasons allowing the market to determine the allocation of resources is not acceptable.
The result of government-led welfare schemes has not been satisfactory either. Soviet Russia built huge welfare machinery but it collapsed under the weight of luxury and waste perpetrated by the Communist Party officials. Indira Gandhi implemented “Garibi Hatao” programmes, the beneficiary of which was the government welfare mafia rather than the poor. The government schools are today ensuring that few children pass the exams and trapping poor people into substandard education. We have to find a way that captures the vitality of the market while providing relief to the poor just as a red stop light is placed on the crossings to allow pedestrians to cross.
The Finance Minister should classify products in ‘good’ and ‘bad’ categories. Chyavanprash is good while cigarette is bad. Fresh buttermilk is good while bottled soft drinks are bad. Handloom is good because it creates employment while power loom is bad because it eats employment. Cycle rickshaw is good because it is environment-friendly while auto rickshaw is bad because it creates pollution. Solar power is good because it provides us with energy security while petroleum is bad. The Finance Minister should impose lower rates of tax on good products and high rates on bad products. Admittedly this will lead to some reduction in the growth rate. Electricity will be allocated more to the production of Chyavanprash and less to cigarettes though the latter can add more to economic growth. But we should accept such low of growth rate. It is like putting a stop light on the crossing. It is not to negate the traffic but to regulate it so that ultimately it moves faster.
A good and healthy society can be created by providing encouragement to the production and consumption of good items like Chyavanprash. It does not make sense to first encourage more production of cigarettes and spread more ill-health among the people; then to tax the cigarette companies, and to buy Chyavanprash from the revenue and distribute it to the people under Integrated Child Development and other schemes. There is no need to adopt such a circuitous route to the provision of Chyavanprash when the same can be provided directly by adjusting the tax rates.
Taxes have a great impact on employment. The Finance Minister wants to apply a single and uniform rate of tax to handloom and power loom, to handmade paper and machine-made paper, to harvesting of wheat by agricultural labour or by automatic harvesters, or to the laying of cable by manual labour and by excavator by the telephone company. This treats capital- and labour-intensive methods of production equally and reduces the demand for labour. The Finance Minister should instead apply lower rates of tax to labour-intensive products.
This year’s winner of Nobel Prize in economics Prof Edmund Phelps has suggested that the European governments provide subsidy to employment instead of running huge money-guzzling welfare schemes. Such differential rates of taxes will benefit those telephone companies that lay cables by manual labour and hurt those that do the same by excavators. Companies will compete with each other to employ more workers so that they can avail of tax concessions. Present law requires that manufacturing companies undertake an energy audit of their operations. A similar ’employment audit’ can be required by manufacturing and service companies. The government can impose a ‘High Capital-Labour Ratio Tax’. Companies that employ more capital and less labour may be subjected to a higher rate of tax.
Economic reforms should be applied to welfare sector. Nitish Kumar government in Bihar has decided to implement the Antyodaya scheme through vouchers that can be encashed by the beneficiary at a shop of his choice. The same formula should be applied to central schemes like Integrated Child Development, Rozgar Guarantee and Indira Awas. Beneficiaries can be provided coupons that can be encashed for the specified service at designated locations. This will create competition among the welfare providers and help dismantle the government welfare mafia that is making merry by locking the poor into poverty. Government school teachers, for example, charge high salaries and provide allurements like mid-day scheme for ensuring that larger number of students fail in the exams.
The Finance Minister must take a lesson from Egypt. The government had in place a scheme where bread was provided almost free to the people. It cost barely 10-15 paise at India prices. Yet, it failed to contain the dissatisfaction among the people. Economic growth failed its leaders because man does not live by bread alone. Egyptian government failed to manage inequality. It failed to build in people and employment friendly policies in the main economic policy. We must give up this blind pursuit of economic growth and moderate it with pro-people policies otherwise we may go the Egypt way.
By Dr Bharat Jhunjhunwala
“The issue of black money is yet to be addressed and there is no clarity on the same. Concrete measures on tackling the issue of food security, education and health facilities are yet to be seen,” said Javed Raza, in-charge of Maharashtra affairs of JD(U).
“The Debt Weaver and Debt Relief schemes for farmers should have been extended for at least 12 months instead of the proposed six months,” Raza said.
Maybe he is unaware of the real intentions behind grant of these schemes. Within six months election in Kerala, Tamil Nadu, Assam and West Bengal would be over and so is the short shelf life of these schemes.
In the union and railways budgets West Bengal emerged as a major beneficiary and both Dada Pranab and Didi Mamta have truly demonstrated their bias in their overzealous attempt to garner votes in poll-bound West Bengal.