Mukherjee's budget more 'cruel than kind'

While presenting the Union Budget for the year 2012-13, the Finance Minister Pranab Mukherjee on Friday quoted from Hamlet, “I must be cruel only to be kind,” as he moved to the Part B of Budget that deals with tax proposals. Well, Mukherjee’s ‘cruelness’ was immediately apparent when he made a large number of goods and services consumed by people from all sections of life more expensive.

He raised the standard excise duty rate and service tax rate by 20 per cent from 10 per cent to 12 per cent. While his ‘kindness’, if any, in the form of benefit to the society or citizens, can only be ascertained in the long term, except for the small tax relief to the salaried class in the next financial year, it is almost certain that there are more pains for people in the offing. 

From the fine print in the budget, it is now implicit that the prices of petroleum products, mainly prices of diesel, petrol and cooking gas, will soon start rising as the government will pass on the increased excise duty and the under-recovery in price on these products to consumers.

This also explains why the Finance Minister provided 36 per cent or Rs 25,000 crore lower subsidy for petroleum products in the next financial year despite the rising oil consumption and the possibility of international oil prices shooting up due to uncertain global oil market owing to Iran tension. 

Sources in the finance ministry are of the view that petroleum prices will be raised in small doses but on a regular basis starting soon after the present budget session of the parliament ends. Price of diesel will be raised sharper as the gap between diesel and petrol has widened by almost 60 per cent, making people to go more for diesel cars -- diesel prices were kept unchanged for long due to assembly polls in five states.
Surely the UPA government will face tremendous opposition to its move, not only from opposition parties, but also from its allies like TMC. However, now it is better prepared to take the political risk as the Samajwadi Party with its 22 MPs has hinted at supporting UPA from outside.

The combined effect of the hike in excise duty, service tax and oil prices will certainly lead to higher cost-push inflation which is still ruling at around 7 per cent. How will the Finance Minister tackle this issue? From various interviews after the budget, it seems, Mukherjee is banking on easing of supply-side constraints. He said that the government has already taken a series of measures to remove supply-side constraints on many agricultural products which have started yielding results. Besides, he also expects that higher government allocations for almost all sectors will lead to bigger consumption-induced growth from the rural and urban population, working as a booster dose for industries to produce and sell more products.

Re-launching reform

The finance minister is clearly betting on a virtuous cycle of higher government spending, higher consumer demand, stronger factory output, larger tax collection and  larger economic growth leading to higher tax collection.

 Said First Global Vice Chairman and Joint MD Shankar Sharma in an article, “Almost no body gives any credit to India for having navigated the worst economic crisis in 80 years, even better than comparable economies like Brazil, Russia, and all countries in Europe. India’s GDP has grown at the average rate of 7.7 per cent in these years, far better than its peers.”

Though the Budget has been criticised for not having direction on reform, there are clear indications that the steps taken are aimed at consolidating two big bang tax system reforms announced by the government two years ago but stuck due to stiff opposition from various states and political parties.

They are the uniform Goods and Services Tax (GST) and the Direct Tax Code (DTC). By raising the service tax and excise duty to 12 per cent the government has converged these rates to the proposed GST rate. Similarly, hiking income tax exemption limit to Rs 2 lakh and imposing 20 per cent tax rate for the income bracket of Rs 5 lakh to Rs 10 lakh, are also aimed at moving towards the personal taxation rates prescribed in the DTC.

Unrealistic assumptions

If Mukherjee’s calculations are based on moderate GDP growth and he expects the economy to grow at 7.6 per cent in 2012-13 against 6.9 per cent in 2011-12, several of his assumptions will have to work.

The most important one is that he expects the fiscal deficit (government’s expenditure over its income) will be capped at 5.1 per cent. However, there are doubts if this will work as we have seen that the 2011-12 estimate of 4.6 per cent deficit has actually jumped to 5.9 per cent on account of lower tax and non-tax receipts.

For the next financial year, the Budget has estimated that the central government’s total tax revenue will rise 20 per to Rs 10.77 lakh crore with big thrust coming from excise duty collection (Rs 1,94,350 crore, up 13 per cent), service tax (1,24,000, up 30 per cent) corporate tax (Rs 3,73,227 crore, up 14 per cent), etc.

But we all know the buoyancy in tax revenue depends purely of the growth of the economy and the performance of industry and services. Given the possibility of slow economic growth continuing because of slower manufacturing; mining; services and agricultural growth, the government will face an uphill task in meeting these revenue targets.

The track record of disinvestment 2011-12 also raises doubts if the government will be able to raise Rs 30,000 crore next year by selling PSU stakes. The Budget has also taken into account a huge non-tex receipt of Rs 58,217 crore by selling telecommunication spectrum (in this 2G auction will be Rs 40,000 crore) in the next financial year. But this is highly optimistic, considering the lack of interest in telecom business owing to large losses by the operators.

Mukherjee will also have a tough time in containing expenditure and restraining subsidies on food, fertiliser, oil products etc, which he wants to be capped at 2 per cent of the GDP. The government’s subsidy target on fertiliser and petroleum products can go completely out of control if the international prices of oil rules very high and if the government cannot muster the political support to pass on higher burden to the users.

The plan outlay for the next year has gone up between 9 per cent 42 per cent for sectors like rural development, communication and IT, health and family welfare, human resource development, petroleum and natural gas, power etc. It is also a big question mark how much of these funds will actually reach the targeted beneficiaries, as large scale leakages and wastage in welfare schemes make them less effective and do not propel consumption growth through multiplier effect.

The other disturbing issue is the huge borrowing plan of the government pegged at Rs 4.79 lakh crore, about Rs 43,000 crore more than the revised estimate in the current fiscal. The bankers and corporates are already worried about the implications of such a large jump in government borrowing because this will have a ‘crowding out’ effect on the funds availability, dry up liquidity, keep interest rates high and thereby make the entire business sector vulnerable to high cost of funding. Surely, as the new financial year unfolds,  it will be interesting to see how the Finance Minister does the balancing act to remain ‘kind’ to people of India.