Even more contradictions to manage: 24th February 2011 Financial Express

Presenting a Budget is always a challenge, given that its importance has evolved from being a rudimentary reflection of the finances of the government to a policy document that drives economic activity. Budget 2011-12 becomes even more difficult since there are certain constraints within which it has to be drawn amidst multiple expectations from all constituents.

The budgetary numbers for FY11 will look good as the economy appears to be buoyant and the targets will be more or less achieved. Tax collections have been stable and increasing while expenditure has been reined in. The government has chosen not to spend the excess collections from 3G auctions, which in turn will help brighten fiscal numbers. The question, of course, is what the government will do next year. In fact, in retrospect, one could argue that the government could have been brash this year considering that globally Keynesianism has caught on, and when the mighty powers run deficits, it is accepted in the name of fostering global recovery. Such a luxury may not be available this year.

Let us look at the constraints first. The DTC has sort of capped the changes that the government can invoke and hence any tax change will have to be within these confines. Second, the GST has been a bone of contention between the Centre and the states, and also indirectly caps the changes that can be had on the domestic duty structure. Third, the benefit of 3G auctions will not be there, which cuts off a major exogenous source of revenue that was there last year. Fourth, while disinvestment has already come to a halt with a deficit likely in FY11, the number will have to be pruned in FY12, given that the stock market may be in a state of flux for the first half.

On the other hand, expectations are that the government will address inflation and growth. The recent IIP numbers will make the government think harder on the growth aspect while the inflation consideration would probably have already been buffered into the calculations. Income tax concessions as well as indirect tax relief would be expected. In fact, a judicious move would be to actually index the exemption limits on income tax with inflation so that it automatically moves up in line with price increases. Sector-specific duty concessions, especially petroleum sector, would be in order.

Government expenditure, on the other hand, will have to continue in the normal course, with added pressure on social and economic expenditure. The food inflation this year is a direct consequence of a neglected farm sector. The lacunae in logistics support will have to be addressed in a comprehensive manner. Warehousing is not a very lucrative business for large players, except where they are building their own retail chains. A look at FDI policy or credit concessions for setting up warehouses could be in order in the light of the Warehousing Act. Since there is talk of changing the APMC Acts, this could also be the focus, though this is a state subject and the government can at best make recommendations.

Two areas that have to be addressed are subsidies and MGNREGA. The petroleum subsidy bill has to increase, given that inflationary issues are a concern today. Also, until such time the UID is implemented, we cannot really enhance the efficacy of the food subsidy scheme. This will continue to remain on the government’s books for some more time. The MGNREGA should be reviewed seriously. While the allocation and motivation is laudable, as this is one of the few success stories of the government, it has to be channelled in a more productive manner.

Today, the numbers on display on the Website are quite disconcerting. While the number of households covered is large, the average number of days utilised is around 35, which is much lower than the 100 that was targeted.

Also, the completed schemes are very few. Clearly, we should make this money work better, which can be accomplished by integrating it with the other requirement in the farm sector.

The basic challenge in drafting any Budget is managing contradictions. Individuals want tax concessions while corporate are never happy with what they get. At the same time, economists want the government to spend more on development while the ubiquitous critics are there to question the fiscal numbers. Even when good budgeted numbers are targeted, the cynics contend that they cannot be achieved. What we should remember is that all the ends cannot be tied up to make everyone happy and some section has to give in. This should be the spirit in which we must look at the Budget.