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The first budget of UPA-II July 13, 2009

Posted by southasiamasala in : India, Jha, Raghbendra , trackback

Raghbendra Jha

Finance Minister, Pranab Mukherjee, presented the budget of the central government of India for 2009-10 on 6th July 2009. The backdrop for this budget was unusual, even by the standards of Indian budgets past. Economic growth during 2008-09 fell to 6.7 per cent from the heights of 9 per cent-plus rates enjoyed for the preceding several years. As the global economy took a sharp downward turn exports started to register negative growth, capital inflows started drying up, and borrowing costs, particularly from abroad, increased sharply. Yet, a government with a sound mandate to govern had been formed, indeed on the basis of a promise to return to high and inclusive economic growth,  and its economic management was being guided by some of the best economists in the country. Hence, there were good reasons to be apprehensive about the economic climate for the next financial year as well as to have high expectations from the budget.

It was against this backdrop that Pranab Mukherjee, handed down the budget. The budget tried to do essentially three things:

  1. It has a strong focus on the less prosperous part of the population. Thus total public expenditure has risen to a mammoth Rs 10.21 trillion, much of it going to the UPA-II’s flagship programs. Allocations for rural India oriented projects have been augmented anywhere from 45 to 144 per cent. The targeting of these projects has favoured villages with large Dalit and Muslim populations. In line with the mandate from the Lok Sabha elections and post-Mandal politics, welfare schemes are now broadly oriented towards affirmative action.
  2. There was a significant effect at tax rationalisation. In particular the government committed itself to the introduction of a unified countrywide, harmonised Value Added Tax by April 2010. If this is successfully completed this would be the single most important piece of indirect tax reform in Indian history. There was significant rationalisation of the income tax structure with a view to consolidating the UPA’s hold among the middle class and some tinkering with the indirect tax structure and the educational cess.
  3. Finally, the government realised that the relatively good performance of the Indian economy for 2008-09, as compared to the rest of the world, was due in some significant part to the stimulus packages announced prior to the Lok Sabha elections. Expectations of reaching growth rates of 8 to 9 per cent in 2009-10 were predicated on the global economy improving substantially.  However, the global economy has failed to pick up significantly and there are still some downside risks, especially on the employment front. Hence, the budget went in for yet another stimulus which has lifted budgetary estimates of the fiscal deficit from the previously announced 5.5 per cent of GDP to 6.8 per cent. If the revenue projections turn out to be unduly optimistic or if the food subsidy bill blows out this may yet turn out to be an underestimate of the fiscal deficit. As a consequence, public debt is likely to hover around 90 per cent of GDP.

The budget is staid and not overly reform-oriented. There is only a modest target for the extent of privatisation and, in the interest of providing a stimulus to the economy even in the face of sluggish tax and non-tax revenues, the government has planned to raise part of its massive borrowings by monetising the deficit. This practice was abandoned in 1993-94 and signalled growing independence for the Reserve Bank of India from the Ministry of Finance. However, the Finance Minister was of the view that blowing out the fiscal deficit and reducing the independence of the Reserve Bank of India was a risk worth taking. Only time will tell whether he was right: officials of Finance Minister were of the opinion that we would know whether the Finance Minister’s gambit paid off only by February 2010, when the next budget will be presented.

At the end of the day economic policymaking is a continuous process and the government’s budget, while being an important policy measure, is just one such policy initiative. From the political point of view, however, the Finance Minister has done well, at least in the short run. To paraphrase the words of John Kenneth Galbraith: no votes have changed inside or outside Parliament as a consequence of this budget.

Comments

1. Stacey Derbinshire - July 13, 2009

Nice writing style. I look forward to reading more in the future.