Union Budget 2009 : Between the lines

Union Budget 2009 - 2010 – An Analysis

With economy showing signs of revival and threat of a bad monsoon, all eyes were on the finance minister Mr. Pranab Mukherjee to deliver an inclusive budget which caters to both India and Bharat. As stated by the FinMin the purpose was to stimulate consumption and thus the growth. His hopes for an early rise from the troughs may pin too much on the monsoon but his budget underscores the broader objective of putting money into people’s hands especially in rural India.
Though the largest budget day fall in the history of Sensex of more than 800 points may not truly denote the merits of the union budget but there may be a thing or two for bears to rise above the bulls on Dalal street for days ahead.
Discussed below are some of the budget proposals as laid down by the finance minister in the Parliament on July 6, 2009.

Agriculture

With more and more districts declared draught hit in this years fledgling monsoon there was an urgent need to address some of the farm issues and Mr. Pranab did just the same by increasing the credit flow target by 38,000 Cr in 2009-10. Also the interest subvention scheme for the short term crop loans and the extended moratorium period for debt waiver scheme also helped the cause. Allocation under the AIBP and RKVY increased by 75 and 30 percent respectively will increase the irrigation benefits to much larger land mass and also provide advanced technology which will help increase the crop yields.
The most important step for agro reforms was the intention to move towards nutrient based subsidy regime and also to move to a system of direct transfer of subsidy to the farmers. This will increase the yields as farmers can use all the fertilizers needed instead of just the urea based fertilizers.
These sops on agriculture as well as rural consumption can give a much needed boost to food processing industry. This can give them the scale to operate at much lower operating costs and thus making them competitive in global scenario which would also be supported by the roll out of GST mentioned in the budget.

Money for Bharat??? Will they consume???

One major highlight of the budget is the different strategies under which money is arranged for the real Bharat that is the rural India which saved the economy from the recession threat.
The first step to be discussed here is the increase in the minimum wages to Rs. 100 under NREGS. This coupled with the increase in allocation of NREGS by 144 percent to Rs. 39,100 Cr is capable of spurring consumption in the most unlikely corners of rural India which covered more than 4.47 Cr households in 2008-09. This means that the people will now have minimum Rs. 100 for 100 days i.e. 10,000 rupees to spend. This amount of money with people who have never seen this amount before will not only help them improve the living standard but also leave something to get themselves indulge into.
What will be the return on this? Well, the budget laid out another proposal by the Finance Minister to increase productivity of the schemes under the NREGA by converging it with some of the other ongoing schemes under water and food resources, rural roads and agriculture and forest resources.
This scheme again opens up an opportunity for financial inclusion of rural masses which is dismal if one refers to the recent BCG report stating that 135 million homes do not have access to formal banking.
Provisions are made to cover all BPL families under RSBY and allocations are increased by 40 percent. Allocations are also increased in NRHM by Rs. 2,057 Cr. This is a solid step in ensuring the aam adami from the health related uncertainties.

Fiscal Deficit - Should we be worrying?

The fiscal deficit has increased from 2.7 percent in 2007-08 to an astounding figure of 6.2 percent of GDP in 2008-09. The growth rate in the last fiscal which stayed at an optimistic 6.7 compared to the sub 6 percent forecast by numerous agencies may have played a part in Governments efforts of staging a sort of economic coup by focussing on a growth rate of more than 7 percent in the current fiscal.
The only worry remains that of the policies of fiscal prudence are being tested a tad too much. Finance minister stated that the fiscal deficit may rise to 6.8 percent of GDP. According to DBS economist Ramya Suryanarayanan with state level deficits added in the combined deficit may rise to an astronomical level of 12 percent of GDP.
Considering the debt-to-GDP ratio at 80 percent the Minister needs to take a stock of rising fiscal deficit before we are reminded of the East Asian Crisis of 1997 which peculiarly had the same flavours of disaster.
The total expenditure of Rs. 1,020,838 Cr is a 36 percent hike in expenditure for 2009-10. Coupled with a record borrowing of $98 billion this budget may dry up the liquidity well pretty fast. This Government borrowing can decline the credit lending to private players as they will have to compete with Government bonds in the local markets. This can put the growth story back to square one. Also concerning is the behaviour of banks where lending is concerned. Now with mandatory 24 percent investment of deposits in Government debt the banks will be forced to keep the rates high even if the RBI behaves otherwise. This can again put a risk of credit squeeze.
In the past too RBI cut the rates by 425 basis points while it was matched with a cut of 150-200 basis points by the banks. The boon of a robust economy during recession can prove a bane as inflationary risks rise due to these huge borrowings by the Government. A proactive role by RBI can only see that the recovery does not slow or even ends with this fiscal crisis.

Information Technology

IT industry was one of the hardest hit industries in the economic slowdown. They were though cheered up by the budget proposals. The tax sops for IT industry was extended by one year and this will immensely help them in retaining their competitiveness and also help them revive with the bouncing economy. Also, the multiple taxation on packaged software will help them cut some costs on that end and the removal of FBT will relieve the employers from paying more for retaining talent. Also an independent mechanism will be put in place to deal with independent captive units of MNCs. Also encouraging was the Government spending planned for Unique ID card for all citizens and computerization of employment exchanges along with huge infrastructure projects. This will generate some revenue from the domestic market as the companies are finding it hard to attain contracts from foreign clients.

Tax Proposals

Government’s resolve to implement GST at the earliest will help attain cost competitiveness for many industries. Adding that with the removal of surcharge over income tax which will increase the post tax income by as much as 5 percent are all pointing towards increase in consumption in coming months. Also increased were the exemption limits and the deductions limits under certain heads. Also weighted deductions on in-house R&D expenses will boost the R&D. The 100% deduction to the donations to electoral trusts will surely help removing the black money out of electoral process. The overall revenue loss rose to about Rs 4 lakh Cr on exemptions.

Disinvestment

The one place where Government tried to pull up the socks was on disinvestment front where a promise of unveiling the complete policy in coming few days and the reduction of Government stake to 51 percent may have left some places to earn the revenue. While the promise to hold public banks and insurance firms with Government may not be as reformist an approach but surely has calmed some nerves of the employees in the sector.

Maharashtra, Tamil Nadu and Bengal

One can not help thinking about the special announcements made for the states of Maharashtra, Tamil Nadu and Bengal and the state elections scheduled for all of these three states in the coming year.
While for the first time Finance Minister has tried to look into the plight of the farmers in Maharashtra who took loans from the money lenders and hence did not qualify for the one-time debt waiver scheme by setting up a task force, it seems a lot of coincidence that the Maharashtra polls are scheduled for September-October this year.
Other important announcement was the increase in allocation of Central assistance to Mumbai to address the problem of flooding. The amount ramped up from Rs 300 Cr to Rs 500 Cr in an election year is again a coincidence. Also even after 3 years the efforts have hardly relieved Mumbai of the flooding woes hence it is not the money that is lacking but the implementation.
Also the extension of moratorium on repayment of crop loans has been increased till December 2009. This may again stress the aligned objectives of Congress and Finance Minister in terms of election strategies.
Allocation of Rs 500 Cr for the rehabilitation of Sri Lankan Tamils may also be well thought of agenda to increase the Congress acceptability in Tamil quarters. The setting up of a handloom cluster in Tamil Nadu may also not be bad idea considering the importance of existing Tirupur cluster being the hub of garment exports in India. Though many people raised the point of Tamil Nadu elections scheduled for next year as a point of reference for these announcements.
The other state where Congress did well in LS elections was Bengal where it is seeing an opportunity to replace the Left rule after a long time. Since the elections are scheduled for next year here too the sops were raining like anything. The setting up of AMU campus in Murshidabad may be aimed at wooing the minority votes away from Left after the recent clashes in Khejuri and Nandigram but it may not serve the true purpose of a full fledged University which is needed badly in that area. Setting up of one handloom mega cluster in Bengal too may underline the importance of Bengal in the national political arithmetic as no cost advantage can be attained after setting a handloom centre in Bengal which does not have a cotton source near it.

Uttar Pradesh

A comeback in UP has had Congress dreaming about the revival in the Hindi belt. This was also a flavour in the Budget. A mega cluster will be set up for carpets in Mirzapur along with Srinagar (J&K). This will help the local economy to a large extent as the adjoining areas in UP are counted among the most backward ones and in past have been blamed for pushing youths into crime. Also the PMAGY for villages with high SC concentration can prove to be a lethal weapon against the Mayawati’s pro dalit campaign in U.P. Also the increase in minimum wages to Rs 100 in NREGS may also help Congress get some crucial positives in electoral terms.

In this budget the Finance Minister has taken a bold step of trying to spend his way out of slowdown. By putting the money straight into aam adami’s hands he has done the right thing but still negatives in the form of inflationary threats and a bad fiscal deficit projections looms over the economy. The North-Eastern states and the J&K were left from the budget at a time when discontent is growing among the states. Only time will tell whether these risks pay off or backfire.

APPENDIX

GST – Goods and Services Tax
BPL – Below Poverty Line
NRHM – National Rural Health Mission
RSBY – Rashtriya Swathya Bima Yojna
NREGS – National Rural Employment Guarantee Scheme
NREGA – National Rural Employment Guarantee Act
LS – Lok Sabha
AMU – Aligarh Muslim University
PMAGY – Pradhan Mantri Adarsh Gram Yojna
Cr – Crore
BCG – Boston Consulting Group
MNC – Multinational Corporation
RBI – Reserve Bank of India
FBT – Fringe Benefit Tax
IT – Information Technology
GDP – Gross Domestic Product
RKVY – Rajiv Kisan Vikas Yojna
AIBP – Accelerated Irrigation Benefit Programme

ACKNOWLEDGEMENT

BUDGET 2009-10 (http://indiabudget.nic.in)
The Times of India
The Economic Times