budget aug 09 vol 53
TRANSCRIPT
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YOJANA August 2009 1
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Ast 2009 Vo 53
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Let noble thoughts come to us from every side
Rig Veda
(Circulation) : pdjucir_ [email protected]
GROWTH, INCLUSION AND RISK ....................... ..................5
Subir Gokarn
FISCAL PROFLIGACY WITH OVERALL DIFFIDENCE .......8Ravindra H Dholakia
THE BUDGET AND ExPORTS: DOING WHAT ITCOULD HAVE ..........................................................................13Amitendu Palit
A CAUTIOUS AND RESTRAINED BUDGET .......................17T N Ashok
FINANCING HEALTH AND EDUCATION ........................ ....21Soumyakanti Mitra
TAxES AND THE BUDGET ........................ ........................ ....25
TOWARDS FASTER RECOVERY..................... .....................28
Jayanta Roychowdhury
IN THE NEwS .......................................................................32
AGRICULTURE AND THE BUDGET ....................... ............33
Surinder Sud
BUDGET AND ENERGY ........................ ........................ .........38Vijay Thakur
ExPANSION WITH INCLUSIVE GROWTH ................ .........41
K R Sudhaman
DO YOu KNOw? ..................................................................45
G-20: A NEW BEGINNING......................................................47
Anindya Sengupta
BEST PRACTICES A NURSERY PLAYINGMANY ROLES ..........................................................................51
Shabana
URBAN INFRASTRUCTURE DEVELOPMENT
IN INDIA ...................................................................................53
Prem Pangotra
SHODH YATRA A MAN WHO WOULD GO TO SUN ....57
COMPETITION LAW AND POLICY: INDIAN
CONTExT .................................................................................59
Amit Singh
FLORICULTURE OPPORTUNITIES FOR INDIA .................62
Kiran Kumar P, Jayasheela
PROTECTING A SACRED GROVE ..................... ...................65
Ram Kumar Bhakat
J&K wINDOw .....................................................................68
BOOK REVIEw ....................................................................71
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2 YOJANA August 2009
FLAgSHIP PROgRAMMES
Bh a r a t N i r m a n
programme launched
in 2005-06 with its
si schemes viz. rural housing,
irrigation potential, drinking
water, rural roads, electrication
and rural telephony is an important
initiative for bridging the gap
between the rural and urban areas
and improving the quality of life
of people, particularly the poor, in
the rural areas.
1. Pradhan Mantri Gram Sadak
Yojana:
The Pradhan Mantri Gram
Sadak Yojana (PMGSY) is
one of the most successful
programmes under Bharat
Nirman. The allocation for this
programme has been raised by
by 59% over BE 2008-09 to
Rs.12,000 crore.
2. Indira Awaas Yojana:
Under the Indira Awaas
Yojana (IAY) for construction
of 21.27 lakh houses, Rs.
8,795.79 crore has been
released till March 31 2009
and 21.05 lakh houses have
been constructed during
2008-09. The Indira Awaas
Yojana ( IAY) is proposed to
be increased by 63 per cent
to Rs.8,800 crore in Budget
Estimates 2009-10. To broaden
the pace of rural housing, FM
has proposed to allocate, from
the shortfall in the priority
sector lending of commercial
banks, a sum of Rs.2,000 crore
for Rural Housing Fund in
the National Housing Bank
(NHB).
3. National Rural Employment
Guarantee Scheme:
NREGS, which was launched
on February 2, 2006, in 200
most backward districts in the
first phase, was epanded to
330 districts in the second phase
during 2007-08. The remaining
266 districts were notied on
September 28, 2008, and the
scheme has now been etended
to all the districts of the country.
More than 4.47 crore households
were provided employment
in 2008-09. A budget of
Rs 39,100 crore has been made
for NREGA, which is an increase
of 144%.
4. Raj i v Gandhi Grameen
Viduytikaran Yojana:
R a j i v G a n d h i G r a m e e n
Viduytikaran Yojana (RGGVY):
Under the Raj iv Gandhi
Grameen Vidyutikaran Yojana
(RGGVY), which is continued
during the Eleventh Five
Year Plan, 59,882 villages
have been electrified and
connections to 53.78 lakh BPL
households have been released
(up to 31.3.2009). propose to
allocate Rs.7,000 crore to this
yojana which represents a 27
per cent increase over 2008-09
(BE).
5. Irrigation:
Bharat Nirman aims to
create 10 million hectares
of irrigation capacity by
2 0 0 9 t h r o u g h m a j o r ,
m e d i u m a n d m i n o r
projects complemented by
groundwater development.
6. Drinking Water:
55,067 uncovered and about
3.31 lakh s l ipped-back
habitations are to be covered
with provision of drinking
water facilities and 2.17 lakh
quality affected habitations
are to be addressed for water
quality problems. Under Bharat
Nirman for rural water supply
Rs. 6,441.69 crore in 2007-08
has been utilized. In 2008-09,
a budgetary provision of Rs.
7,300 crore had been made out
of which Rs. 7,276.29 crore
(almost 100 per cent) has been
utilized.
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YOJANA August 2009 3
Abot the Isse
I
t is etremely rare for a Union Budget in this country not to raise debatesand discussions. Despite the fact that budget is not the only platform forannouncing economic policy decisions, despite also the fact that usually
more such policy announcements are made throughout the year than on thisparticular day alone, this annual event continues to attract an etremely keenfollowing. And justiably so, for the annual budget reects the intent of thegovernment, offers an insight into the country's nancial health, sets the tone forfurther policy decisions and charts out the general roadmap that the developmentcaravan is likely to follow during the year. For an economy battling the impactof a global economic downturn , this roadmap charted out by the governmentassumes special signicance.
The Budget for 2009-10 has been presented at a time when much of the developedworld is hit by recession. The downturn has hit trade, commerce and industry in the country, brought down
growth rates, thrown people out of jobs and put a question mark on the future of development projects. Intimes of such stress, the average Indian, as well as those who run businesses, rightly turn to the governmentfor solution and epect initiatives that can help the economy regain its foothold. Especially so, when thegovernment has just come back to power, strengthened by a clear majority in the general elections.
Against this backdrop of economic compulsions and raised epectations, the Budget 2009-10 has triedto address the three major challenges facing the economy - to revive the 9 per cent GDP growth rate atthe earliest, to deepen and broaden the agenda for inclusive development, and to energize government andimprove delivery mechanism. As a short term measure for steadying the shaky economy, the governmenthas stepped in with a huge spending of Rs 10.21 trillion directed largely at public projects and ta relief. Theidea is to propel growth by increasing demand. Allocations have been raised for the Flagship Programmes ofthe government, the Rural Development sector, Infrastructure, Education and programmes directed towards
the weaker and poorer sections of the society. This year's budget was a really difcult balancing act betweenhuge demands on one hand and very restricted choices for raising ta revenue on the other.
Given this fact, many feel that this was the best the Finance Minister could have done under the circumstances.However, there will always be critics who feel that the budget could have shown more scal discipline bykeeping the scal decit low. The Economic Survey has meanwhile indicated signs of recovery for theeconomy. As such, the government can also take this into consideration while setting its agenda. The articlesinside bring you opinions from eperts about how the budget has treated the different sectors.
Opinions will always remain divided. Only time can tell how the economic management of the country shapes upover the year, and whether the roadmap charted out by this budget is actually able to lead us out of this economicdownturn. q
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4 YOJANA August 2009
A Bdet for the Aam AAdmi
Environment and climate change
l Allocation for the Bharat
Nirman Schemes raised by 45
per cent.
l National Rural Employment
Guarantee Scheme (NREGS)gets 144 per cent more,
l Pradhan Mantri Gram Sadak
Yojana (PMGSY) 59 per cent
more,
l Raj iv Gandhi Grameen
Viduytikaran Yojana (RGGVY)
27 per cent more and
l Indira Awas Yojana (IAY) 63
per cent more than last year.
A sum of Rs. 2,000 crore
has been allocated for Rural
Housing Fund.
l A new scheme, Pradhan
Mantri Adarshgram Yojana
(PMAGY) will be launched
this year on a pilot basis for
integrated development of
1000 villages with above 50
pe r cent Scheduled Cas te
population.
l Stress on the formation of
women Self Help Groups
l In furtherance to National Action Plan on Climate Change, eight national missions representing a multi-
pronged long-term and integrated approach to be launched.
l National Ganga River Basin Authority set up. Budgetary allocation under National
l River and Lake Conservation Plans increased from Rs.335 crore in B.E. 2008-09 to Rs.562 crore in B.E.
2009-10.
l Special one-time grant of Rs.100 crore given to Indian Council of Forestry Research and Education,
Dehradun.
l Rs.15 crore each to be allocated to Botanical Survey of India and Zoological Survey ofIndia. An additional
amount of Rs.15 crore to be allocated for Geological Survey of India
(SHGs). Along with capital
subsidy at an enhanced rate,
in terest subsidy to poor
households to be provided for
loans upto Rs. 1 lakh from
banks.
l ANational Mission for Female
Literacy to be launched
l The Swarna Jayanti Gram
Swarozgar Yojana (SGSY)
to be restructured as National
Rural Livelihood Mission to
make it universal in application,
focused in approach and timebound, for poverty eradication
by 2014-15.
l A new scheme, Rajiv Aas
Yojana will be introduced to
make the country slum free in
the next ve years.
l The Budget commits that all
Integrated Child Development
Services will be etended to
every child under the age of si
by March, 2012.
l The allocation for the Ministry
of Minority Affairs has been
increased by 74 per cent. The
Budget has made allocations for
the new schemes of National
Felloship for Stdents from
minority community.
l A new project is being launched
for modernization of the
Employment Echanges to
enable job seekers to register
on-line from anywhere and
approach any employment
echange.
l The Government proposes
to bring all BPL families
under the Rashtriya Swasthya
Bima Yojana (RSBY). The
allocation for the scheme is
being increased by 40 per
cent.
l Draft Food Security Bill to be
put on the net soon for public
debate and consultations.
The proposed National Food
Secrity Act will ensure thatevery family living below the
poverty line in rural or urban
areas will be entitled by law
to 25 kilos of rice or wheat per
month at Rs. 3 a kilo.
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YOJANA August 2009 5
Growth, Inclusion and Risk
BudgET 09-10
HE UNION Budget for2009-10 was presenteda g a i n s t a c o m p l e backdrop. There was theinescapable reality of theeconomic environment.
Growth in the Indian economyhas slowed considerably evenas much of the world has gone
into a pretty deep recession. Thegovernment has been respondingto the situation, but was obviouslysomewhat constrained by theelectoral cycle. This budget wasthe first opportunity to mount asystematic and concerted effortto get things back on track. But,beyond the short-term considerationof offsetting the slowdown, therewere several long-term factors
prominent in the backdrop. Aftera decade, the composition of theruling coalition had swung sharplytowards single-party dominance.This raised epectations of a lesscontested policy agenda, whichwere reinforced by the largelyreformist intentions articulatedin the Presidents Address toParliament and the even more
T
The author is Chief Economist, Standard & Poors Asia-Pacic.
The size of
the overall scaldecit as well as
the increase indisposable incomes
should help stabilizeeconomic growth this
year, while layinga foundation for
acceleration next year
Subir Gokarn
ambitious Economic Survey for2008-09.
In my view, the Budget didnot live up to these epectations.Like many people, I was hopingto hear a strong and clear messageabout the many measures thatthe government would take tofurther its inclusive growth agenda
and then to see specific budgetinitiatives placed in this contet.The Finance Minister was carefulto point out that the Budget was notthe only policy statement that thegovernment would make, so one
must not assume that it dened theboundaries of the agenda. We canwait and watch for more to happen.Nevertheless, the opportunity tocreate a policy contet for the now
certain ve-year term that a rst-year budget provides should havebeen used more effectively.
However, if one had more modestepectations from the Budget, viz.,what it it actually going to do forthe economy in the short term, thenone had virtually no reason to bedisappointed. Nothing in it will do
OpiNiON
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6 YOJANA August 2009
any harm and several things may doa lot of good. Of course, loomingover this rather benign view is asignificant risk of a fiscal blow-out. In what follows, I make briefassessments of the Budget proposalson the basis of four sets of criteria:
Growth, Infrastructure Development,Inclusion and Fiscal Discipline.
groth
There are no two ways about it: a
scal decit of 6.8 per cent of GDPwill provide a growth stimulus. Therecent signs of a turnaround in theeconomy are, in my view, largelydue to the stimulus that was providedtowards the end of 2008 by way of
implementation of the Sith PayCommission recommendations.Over the past few months, this hascontributed to a surge in sectorssuch as consumer durables, andsome automobile segments. Moredeficit spending by governmentwill clearly reinforce this tendency.More pointedly, the Budget has
signicantly incentivized consumerspending by means of the abolition
of the personal ta surcharge andlifting of ta liability thresholds.The initial impact of these measureswill obviously be skewed towardsconsumer goods, including the twosegments referred to above, but if themomentum that is generated sustains,it will spill over into others throughlinkages. At the very least, the size of
the overall scal decit as well as theincrease in disposable incomes shouldhelp stabilize economic growth thisyear, while laying a foundation foracceleration net year.
Infrastrctre Development
The Budget scores reasonablyhigh on this front. Allocations tomost of the infrastructure ministries,which will implement projects, haveincreased substantially, in many
cases accelerating in comparison
with the previous year. The powersector, perhaps the weakest link in the
infrastructure chain, was given about
46 per cent more money than in the
previous year. Urban development
has also been given significantly
more money under the umbrella of
the JNNURM. These are all veryre-assuring, but even at the risk of
be-labouring the point, the economic
impact of these allocations, both in
the short term and the long term, will
be when they are actually spent.
In an environment in which
private investment, both domestic
and foreign, will be reluctant to fund
long-gestation greeneld projects,
the role of public funds becomeseven more critical. The epansion of
the capacity of IIFCL to intermediate
funds from the banking system to
infrastructure projects will also
help. Ultimately, however, solid,
commercially viable projects have
to be available. This requires more
diligence and co-ordination on
the part of several government
agencies at the central, state and local
government agencies. The intentionto set up key project monitoring
mechanisms is an important step
in facilitating this and they must be
initiated as quickly as possible.
Inclsion
The NREGS is clearly perceived
by many people, within and outside
government, to have played a stellar
role in the re-election of the UPA.Even with its limited coverage
and concerns about inefficient
implementation, it offered several
millions of people a safety net thatjust did not eist before. Securityagainst complete deprivation is afundamental component of inclusionand the intent of governmentto broaden the programme and
hopefully make it more efcient is
clear from the signicantly larger
allocation made to it. On the otherdimensions of inclusion, viz., healthand education, it is striking thatthe allocations have not increased
signicantly over the previous year.A lot of activity in these sectors is,of course, funded by state and local
governments, but it is a bit surprisingthat the central government, whichswears by its inclusiveness agenda,should have been so conservativein its allocations. One couldargue that this simply reflectsthe governments belief that theenormous slack in the system canbe reduced enough to get a lot morebang for the buck but, here again,the issue of delivery and the several
weaknesses in the system is critical.Accompanying the at allocationsmust be a programme to rapidly
improve the efciency of delivery.
Fiscal Discipline
This is the one dimension onwhich one has to find fault withthe Budget. There is, inevitably, acontradiction between assessing theBudget favourably with respect to
growth because of the high fiscaldecit and then complaining aboutthe size of the decit. However, theconcern is not so much with the size of
the decit at this point in time, wherethe contradiction is most obvious butwith the absence of an eplicit strategy
to deal rmly with the problem as theeconomy recovers and the need for
scal stimulus reduces. An ambitiousdisinvestment target was epectedto be announced in the Budget, buteventually a very small target was set.Other sources of non-ta revenue, e.g.,the spectrum auction, are essentiallyone-time realizations. We need to seemore articulation of reforms on theta and ependiture fronts, which willconstitute a dynamic plan to reduce the
decit. That was not in the Budget.Some reassurances have come from
subsequent activity to prepare the
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YOJANA August 2009 7
ground for somewhat more substantialdisinvestment than was targeted, butuntil the money is in the kitty theproblem will not go away.
One additional source of comfortis the relatively conservativeestimates for ta revenue growth.Overall revenues are epected toincrease by a mere 2 per cent, withmost sources actually decliningrelative to the previous year. The
only signicant growth is expectedto come from corporate taeson account of the raising of theMinimum Alternate Ta (MAT)liabilities, which means that theaverage ta collections per company
will increase. The aggregateestimates appear to be somewhatpessimistic in the current economicenvironment but, consequently,the likelihood of collections rising
beyond estimates and the fiscaldecit narrowing is higher. Perhapsas a strategy it is more effectiveto set epectations low and thensurpass them rather than the otherway round. However, one cannotwish away the nervousness that the
high decit has evoked amongstinvestors; the impact it may have oninterest rates can derail the recovery
process and to that extent, decit-induced growth is a rather riskyproposition.
Speaking about reforms, thecommitment to introducing theGoods and Services Ta (GST)at the central level in 2010 is
rather ambitious but entirelywelcome. While it may take time toimplement smoothly, this is a majorreform to the ta system, whichwill incentivize all those who are
outside the ta net today to enter it.There will certainly be signicantlong-term payoffs from this in theform of a higher Ta-GDP ratio.
On three of the four criteria thatI laid out, the Budget certainly hadsome positive measures or, at least,
did no harm. However, the highdependence on a large decit to inducea quicker recovery in the economybrings with it significant risks ofhindering that very recovery throughits impact on interest rates. In a benignenvironment, with low inationarypressures and high capital inows,things may pan out as planned. Butif, for example, inationary pressuresre-emerge, monetary and scal forces
could come into conict, threateninggrowth and stability. q
(Email : subir_gokarn
standardandpoors.com)
YE-8/09/1
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8 YOJANA August 2009
Fiscal Proigacy with Overall Difdence
BudgET 09-10
N N U A L B U D G E T
i s s u p p o s e d t o b e
a c o m p r e h e n s i v e
compilation of the scal
policy statements of a
government. A pure scal policy
is any policy that directly affects
governments ependitures and
revenues. Union government in India
accounts for approimately 55% to
60% of all government activities.
Union budget is, therefore, an
etremely important statement for
the domestic and foreign business
sector who intends to do business
in or with the country.
Budget is invariably seen and
eamined in the contet of and
within the framework providedby the annual Economic Survey
prepared by the Ministry of Finance
(MoF), which tables it in the
Parliament a couple of days before
the budget. The Economic Survey
presents the SWOT (strengths-
weakness-opportunity-threat)
analysis of the countrys economy
A
The author is Professor of Economics, Indian Institute of Management, Ahmedabad.
The present
budget, ignoring
completely scal
prudence, has
chosen to provide
temporary relief
to the present
generation by
imposing
severe burden
on the future
generations
Ravindra H Dholakia
and provides policy prescriptions
for the short, medium and long
terms. Since 1991 in India,
professional Finance Ministers
(FMs) have been abiding by the
Economic Survey while preparing
the budget and in case they decided
to deviate from what was mentioned
in the Survey, they felt obliged tojustify their decision to deviate
temporarily. This background is
relevant because after 1991, for the
rst time this year, there is almost
a total disconnect between the
Economic Survey and the Budget
proposals.
State of the Indian Economy
The performance of the Indianeconomy during the year 2008-09
in terms of critical parameters
would be very relevant to eamine
the plausibility of the assumptions
underlying the calculations in the
budget. The growth of real GDP
during 2008-09 was recorded
at 6.7% compared to 9% during
pErSpECTiVE
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YOJANA August 2009 9
2007-08. This was the effect of
the global crisis and subsequent
slow down in the Indian economy.
The last quarter (Jan-March, 2009)
of the year recorded the growth of
only 5.8%, which was 0.5% point
higher than anticipated. As such
the second last quarter (Oct-Dec.
2008) of the year had also clocked
the growth rate of 5.8%. Thus,
the fall in the growth rate of real
GDP was arrested by the end of
the year 2008-09. The Prime
Minister had announced that the
worst phase was behind us and
that we had started recovering.
Moreover, in all these growthgures, the growth of agricultural
was substantially less than the
average recorded in the last 3-4
years. Current monsoon is not
very good, but is also not bad,
implying that we could achieve 3
to 3.5% real growth in agricultural
during 2009-10.
In the matter of prices, the target
of ination was totally frustrated
with a substantial unanticipated
ination driving the WPI based 52
week average inflation reaching
8.4% , CPI (Industrial Workers)
based inflation being 9.1% and
CPI (Rural Labour) based ination
crossing double digit to 10.2%.
Causes for this are well known,
but failure to contain ination wasparticularly harsh on the rural poor
because they suffer the most when
unanticipated inflation occurs.
Subsidy programmes for food,
shelter, employment, etc. have to
be viewed as efforts to compensate
rural poor for the unanticipated
inflation just as the dearness
allowance (DA) compensate the
industrial workers.
The Fore reserves stood at $
252 billion on 31st March, 2009
implying a huge net outflow of
about $ 60 billion during the year.
Most of the liquidity epansion
undertaken by RBI through
monetary policy measures during
the last year was primarily to ght
such an unprecedented drain on
liquidity created by the net outow
of $ 60 billion. However, since
April, 2009 things have started
looking up and we have already
received FII and FDI inows of
about $ 8 to 10 billion by end of
May, 2009. The echange rate that
averaged $ 1 = Rs.46 during 2008-09 showing a 15% depreciation
over 2007-08 started showing the
signs of appreciation. From the
peak of $1 = Rs.51.20 in March
2009, it has already appreciated by
6.5% in June end.
The fiscal deficit was the
greatest cause of concern. The
ofcial revised estimate of the scal
and revenue decits for the year
2008-09 signicantly exceeded the
budget estimates and stood at 6.2%
and 4.6% respectively. The FRBM
Act targets were comprehensively
missed. For the rst time in the
last 40 years, we reported a primary
revenue account decit, and that
too, of 1% of GDP, which implies
that our revenues are insufcientnot only to meet our capital outlays
and interest obligations but also a
part of our current consumption
ependitures. Fiscally, this is
a grave situation and must be
immediately addressed. It is argued
by several economists and policy
makers that once in a while such a
situation would not be unacceptable
particularly when the government
was required to pump-prime the
economy to sustain growth and
employment. However, a closer
eamination would reveal that the
real net scal stimulus provided in
response to the global melt-down
and its adverse impact on the
Indian economy was hardly 1 to
1.3% points of GDP, whereas the
fiscal slippage was almost three
times the amount. This was only
on account of scal proigacy and
cannot be ascribed to the fiscal
stimulus argument. Thus, there
was an urgent need to correct the
scal imbalance in the budget for
2009-10.
Objectives of the Bdet 2009-
10
As per the budget speech of the
FM, there are about 11 different
objectives that the budget would
address. Most of these objectives
are from the election manifesto of
the ruling party as one would epect.
However, scal consolidation orscal discipline did not gure in that
list of objectives. Essentially, the
budget would aim at (i) continuity
of the policy reforms particularly in
terms of disinvestment and focus on
infrastructural investment to make
it 9% of the GDP; (ii) stability
in terms of controlling inflation
and providing food security by
aiming at 4% annual real growth ofagriculture; (iii) prosperity in terms
of achieving 9% real growth of GDP
in the medium term; (iv) inclusive
growth in terms of targeting 50%
reduction in population living
below poverty-line by the year
2014; and (v) social development
in terms of providing employment
guarantee, social security, raising
real wages and housing to the
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10 YOJANA August 2009
needy. The FM has categorically
mentioned in his speech that a
single budget could not solve all the
problems and meet all challenges,
and that budget would not be the
only means to do so. Thus, there
would be other announcements
and off-budget policies likely to
be made periodically, which means
that this budget would not reect
comprehensive compilation of the
scal policy of the government. Like
monetary policy, now even the scal
policy would change frequently.
This in itself is not a good news
for the business sector because it
would only increase uncertaintydue to policies and would not
provide a stable environment for
the business. It can have adverse
impact on the investment decisions
of the domestic business and more
so for the foreign direct investment
by the foreign investors.
Assmptions underlyin the
Bdet 2009-10
Budget is an eercise to project
/ forecast future revenues and
ependitures. These forecasts
are always based on detailed
a s sumpt ions a bou t c ruc i a l
parameters. The most crit ical
parameters in this regard are (i)
growth of real GDP; (ii) ination;
(iii) growth of industry; (iv) growth
of eports and imports; (v) average
echange rate; etc.
The present budget has assumed
a nominal growth of GDP to be
10.05% for the year 2009-10. The
medium term targets are 12.4%
and 13% for the years 2010-11 and
2011-12 respectively. The nominal
growth of 10% in GDP consists
of the target of 6.51% growth in
real GDP and 3.32% ination rate
during the year 2009-10. Thus, we
have assumed a further decline or
deceleration in our real growth of
GDP from 6.7% achieved during
2008-09 to 6.5% in 2009-10. This
is in spite of the predictions about
reasonably good monsoon this year
compared to the last year. It seems
that MoF is not convinced about
the recovery from the slow down
and is overcautious overwhelmed
by the growth pessimism and self-
diffidence. If China, our major
competitor in this regard, is hoping
to achieve a real growth of 8% in
GDP during 2009-10, it is not onlysurprising but somewhat shocking
that we want only 6.5% real growth.
This is because Chinas dependence
on eports is more than 30% of its
GDP whereas our dependence is
not even 20%. It is well known
that these two economies have
eperienced adverse impact of
the global meld-down largely
through their dwindling eports.Since we have decided to target
lower growth net year than the
last year, our policy initiatives
and reforms during the year are
also not epected to be aggressive
accordingly. They are epected
to be slow, gradual, consumption
oriented rather than investment
promoting, and social sector based
instead of focused on economicrecovery. Most of the ependiture
proposals in the budget 2009-10 fall
under these typologies.
Ination target set in the budget
seems to be too ambitious because
it disregards past eperience and
consistency. The target of 3.3%
inflation during 2009-10 should
be compared to the GDP deator
ination and not to the WPI or CPI
ination. During 2008-09, the GDP
deflator showed 6.2% inflation.
Although the WPI based ination
during the rst quarter of 2009-10
(March to June) would be less than
1%, the CPI ination would be more
than 7 to 8%. Moreover, petrol
and diesel prices have recently
been revised upward by about 8
to 10%, which is likely to ignite
further inationary pressures in the
economy. On the other hand, the
unprecedented scal decit planned
in the budget and a huge increase
in the government consumption
ependitures provided in the budget
would only add to the inationary
pressures. It is most unlikely that
the target of containing the GDP
deator ination to only 3.3% could
be achieved.
M o r e o v e r , t h e b u d g e t
calculations on revenue generation
from personal income ta and
service ta seem to be based on an
assumed nominal growth of 9%in the personal incomes, which is
less than 10% growth of nominal
GDP assumed by MoF. Further, it
also disregards normal buoyancy of
personal income ta achieved in the
recent past. Similarly, the corporate
sector and industrial sector are
assumed to grow hardly at 3%
in real terms as revealed by the
budget forecasts of the corporate
income ta and ecise revenues.
Similarly, it seems that the customs
revenues are predicted on the basis
of a negative growth of imports in
the range of 5 to 8% coupled with
epectation of further appreciation
of the rupee by 3 to 4%.
All these assumptions made in
preparing the budget 2009-10 are
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YOJANA August 2009 11
not indicating any optimistic view
of the future growth and recovery.
Rather, they suggest etremely
defensive and difdent approach
of the FM and the Cabinet and
hence provide the background for
epectations about likely reforms
in economic policies. For instance
the provision of only Rs.1,120
crores from disinvestment in the
budget against the recommended
amount of Rs.25,000 crores by
the Economic Survey makes the
intensions of the FM in this regard
clear. The actual provision of Rs.
1,120 crores from disinvestment
is less than half already achieved
in the year 2008-09, which was
the year of political strife and
controversies. Markets, on the
other hand, had epected a very
bold, aggressive and optimistic
outlook with great commitments
to policy reforms. It is, therefore,
not surprising that the stock market
crashed significantly after the
budget. As a major indicator ofthe reversal in reforms, the current
budget substant ially increased
the size of the government by
increasing the total ependitures
from 13.8% of GDP in 2008-09
(BE) to 17.4% of GDP in 2009-
10 (BE). This is only for the
union government. If we add the
states, the size of the government
would cross 30% of GDP, whichis way above the critical limit of
25% suggested by Colin Clark for
efciency and effectiveness.
Fiscal Discipline
Fiscal proigacy is the biggest
limitation of this budget. Several
economists including the present
author had suggested in the pre-
budget epectations that undue
concerns about meeting the targets
of FRBM immediately by 2009-
10 need not prove a constraint
for providing the scal stimulus
for fast recovery and return to the
growth path of 9% plus by the net
year. However, nobody could have
imagined that concerns of scal
prudence and discipline would be
so thoroughly disregarded in this
budget. The scal decit during
2008-09 increased from budgeted
2.5% of GDP to 6.2% of GDP
(Actual). This should have been
brought down to 5% or 5.5% in
this budget. Instead, it further
increased to 6.8% of GDP as perthe budget. If we add below
the line subsidies for oil and
fertilizers, the true scal decit
increased to 8% of GDP in 2008-
09. These subsidies generally
increase during the year and are,
therefore, not fully provided in the
budget. If we make reasonable
assumptions about them, the
present budget may also result inthe true scal decit of about 8%
to 8.2% of GDP. When we add
the scal decit of states, which
is allowed to increase to 4% of
GSDP in this budget, the overall
scal decit would become 12%
of GDP. This is repeated without
any efforts to control it during
this year.
Such a fiscal behaviour is
simply not sustainable. It implies a
long term debt-GDP ratio of more
than 250% and clearly points to
the impending threat of debt-trap
and eventual bankruptcy. To come
out of such a scal mess, the future
generations will have to sacrice
substantially in terms of higher
taes, higher interest rates, lower
growth and higher ination. This
would not happen if the present
fiscal profligacy was directed
towards achieving faster growth
recovery by targeting 8% to 8.5%
real GDP growth. This could have
happened with lower ependitures
and lower revenues, but with the
ependitures for investments and
capacity creation rather than for
unproductive consumption of
populist schemes and programmes
like NREGS, Mid-Day Meal,
Bharat Nirma, Indira Awas Yojana,
etc. In most of these schemes, only
temporary assets are built and a
large part of the ependitures areeconomically wasteful. This budget
is likely to lead the international
rating agencies to downgrade our
ratings thereby increasing effective
borrowing costs for us. Higher
scal decit implying a staggering
public borrowing eceeding Rs.4
trillion during the year would,
moreover, result in higher interest
rates and would crowd out private
investment leading to lower
growth potential. Further, it
would discourage foreign investors
who have already withdrawn $ 1
billion in less than 10 days after
the budget.
Thus, the present budget,
ignoring completely the fiscal
prudence, has chosen to providetemporary relief to the present
generation by imposing severe
burden on the future generations.
Elected representatives need
to ponder over whether they
have such a moral authority to
decide on behalf of the future
generations. q
(Email- [email protected])
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12 YOJANA August 2009
HOw wILL THE BuDgET IMPACT
The hosehold
l Select Life Saving Drugs and
medical equipment to cost
less
l LCD TVs,
l Mobile Phones, l Branded
Jewellery,l S p o r t s a n d
Leather products,lPackaged
Software,Footwear may cost
less
l Contact lenses, toothbrushes,
man-made fabrics, set top
boes, gold and silver may
cost more.
Ta Payer
l Income-ta eemption limits
raised by up to Rs 15,000 for
senior citizens and Rs 10,000
for the general tapayer.
l 10 % surcharge for those
earning more than Rs 10 lakh
annually, removed
l Fringe Benefit Ta (FBT)
abolished
l Commodity Transaction Ta
abolished
l Wealth ta now payable on
wealth above Rs 30 lakh
instead of Rs 15 lakh
l Gifts in kind above Rs 50,000 to
become taable from October
Bsiness
l Ta wr i t e - o f f o n R&D
ependiture etended to allmanufacturing units
l Credit on Minimum AlternateTa can be carried forward for10 years instead of 7
l Section 10A and 10B ta holidayfor STPs and EOUs etended toMarch 31, 2011
l MAT up from 10 % to 15 %
l Service ta on legal consultancyto rms
The Investor
l Commodity Transaction Ta onderivatives trading abolished
l New Pension Scheme eemptedfrom I-T, Securities TransactionTa and Dividend DistributionTa
l
NPS not eempted from ta onmaturity or withdrawal.
Farmer
l The target for agriculture credit
ow increased from Rs. 2,87,000crore last year to Rs. 3,25,000
crore for 2009-10.
l The interest subvention for
short term crop loans up to Rs.
3 lakh per farmer to continue
with additional subvention of
1 per cent to those farmers
who repay such loans onschedule
l The time for paying 75% of
overdues under last years farm
loan waiver scheme etended
to 31st December, 2009. A
Taskforce being set up to
suggest action regarding some
Maharashtra farmers not covered
by loan waver scheme.
l Allocation under RashtriyaKrishi Vikas Yojna (RKVY)
raised by 30 per cent and that
for Accelerated Irrigation
Benet Programme by 75%
l Plans to move towards nutrient
based subsidy regime instead
of the current product pricing
regime for fertilizers.
Economy
l High government ependiture
aimed at creating demand and
boosting growth.
l Fiscal Deficit High, but
institutional reform measures
to be initiated to control it.
FOR YOu
COSTLIER
Set Top Boes and
Gold and silver
become dearer
Cosmetics, Contact
Lenses to cost more
Bulk Gems,
Toothbrushes will be
dearer
Man Made Fabric,
Walkman, I-Pod will be
costlier
Plastic Surgery and
Legal Fees will be
epensive
CHEAPER
Mobile Phones, LCDTV to cost less
Cardiac, Hepatitis B,
Arthritis and Cancer
Essential Drugs Care
to cost less
Sports Equipments and
Big Cars to be cheaper
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YOJANA August 2009 13
The Budget and Eports: Doing what it
could have
BudgET 2009-10
HILE PRESENTING
the Union Budget for
the scal year 2009-10,
the Finance Minister
drew attention to the
significant structural changes
that have taken place in the
Indian economy over the last
decade. Reference to structural
change in the contet of the
Indian economy usually implies
the growing contribution of the
services sector to overall national
output and the stagnant role of
industry and manufacturing in
this respect. However, in the
current contet, the FinanceMinister was also referring to
the increasing integration of the
Indian economy with the world
economy. As he further pointed
out, Indias trade in goods and
services was currently estimated
w
The author is a Visiting Research Fellow at the Institute of South Asian Studies (ISAS) in the National University of
Singapore (NUS).
Incentivization
of investment
in development
of agriculturalinfrastructure
can be useful in
enhancing Indias
export prospects
in the long term
Amitendu Palit
at 47 per cent of its GDP. At this
level of integration, the eternal
sector can no longer be ignored
as a less-important contributor
to the economy compared to its
domestic counterpart.
The Backdrop to the Bdet
The Budget was presented in
the backdrop of a troubled eternal
sector scenario. The balance of
payments (BOP) estimates for the
year 2008-09 were released on June
30, 2009, eactly a week before
the presentation of the Budget.
Norma lly, Un ion Budge ts are
placed at the end of February, a timeof the year when only si months
information on BOP is available.
However, this time around the
Budget was richer in terms of
knowledge of the developments for
the whole year. These developments
pErSpECTiVE
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14 YOJANA August 2009
underlined build-up of some
pressures in the eternal sector.
Under no circumstances can these
pressures be construed as pointers
towards emergence of structural
vulnerabilities. Nonetheless,
given the robust health of Indias
eternal sector in recent times, the
pathological report released by
the RBI at the end of last month
pointed to some unmistakable signs
of stress.
The main imbalance was
noted in the proportion of the
current account deficit withrespect to the Gross Domestic
Product (GDP). At 2.6 per cent
of the GDP, the current account
deficit was perhaps larger than
what most had epected. Current
account deficits higher than 2.0
per cent of GDP tend to bring
back uncomfortable memories of
1988-89 to 1990-91 the period
when India encountered the most
serious eternal sector crisis in
its independent history.
The year 2007-08 had ended
with a current account decit of
1.5 per cent of GDP. However,
most had not epected the world
to suffer such a choking slowdown
in 2008-09. They had also, in a
similar vein, not epected the
global downturn to inict as much
impact on Indias eternal sector as
it had. This is where recognition
of Indias trade integration with
the world economy assumes vital
importance. The effects of the
downturn, admittedly, have not
been pervasive and across-the-
board. At the same time, theres
no denying that greater global
integration has resulted in India
facing the consequences of a sharp
contraction in global trade.
A steep drop in merchandise
eports has led to a swelling of the
trade decit, which has eventually
risen to 10.3 per cent of GDP at
the end of 2008-09. The current
account decit would have certainly
eceeded 3.0 per cent of GDP had
the invisibles surplus (7.7 percent of GDP) not compensated
a considerable part of the trade
decit.
T h e h i g h t r a d e d e f i c i t
underscored a sharp deceleration in
growth rates of both merchandise
eports and imports. Merchandise
eports grew by only 5.4 percent in 2008-09 (on BOP basis)
compared with a far higher growth
of 28.9 per cent in 2007-08. The
growth deceleration in the current
year was entirely an outcome of the
eport compression eperienced
during the second half of 2008-
09 with eport growth turning
negative (-20.0 per cent) during
the period. Imports also showed a
negative growth of -16.6 per cent
during the second half of 2008-09.
The negative growth in imports
was particularly pronounced in
the fourth quarter (January-March)
of 2008-09 when the domestic
industrial slowdown manifested
in a sharp cutback in production-
related imports.
Bdeted Measres
From a trade perspective, the
priorities for the Union Budget were
quite clear from the outset. The
Budget had to address the primary
concerns of eporters. However,
in this regard, it is important to
understand the limitations of the
Budget. The Budget is not an
eercise in trade policy. By itself,
it can contribute to stimulation of
demand within the economy bysetting in motion an investment-
income multiplier. However, it is
helpless in stimulation of eternal
demand the lifeline for eports.
A revival in demand for Indias
eports depends upon the recovery
in main eport markets, primarily in
North America and Europe, which
still appear to be some distance
away. The Budget therefore could
have contributed only in alleviation
of some of the specic concerns
of eport-oriented industries and
eporters that were essentially of a
non-demand nature.
This is eactly what the Budget
has tried to do by announcing thefollowing steps for restoring eport
growth:
l Adjustment assistance scheme to
provide enhanced Eport Credit
and Guarantee Corporation
(ECGC) cover at 95 per cent to
badly hit eport sectors etended
till March 2010.
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YOJANA August 2009 15
l A l l o c a t i o n f o r m a r k e t
development assistance scheme
enhanced to Rs 124 crore.
l Interest subvention on pre-
shipment credit for seven
employment-oriented eportsectors etended from September
30, 2009 to March 31, 2010.
l Sunset clause for deduction of
export prots under sections
10A and 10B of the Income
Ta Act etended by one more
year till the financial year
2010-11.
l Epansion in the list of duty
eempt raw materials/inputs
imported by manufacturer-
eporters of sports goods,
leather goods, tetile products
and footwear items.
l Two taable services - Transport
of goods through road and
Commission paid to foreign
agents to be eempted from
service ta, if the eporter is
liable to pay service ta on
reverse charge basis. Thus
there would be no need for the
exporters to rst pay the tax and
later claim refund in respect of
these services.
l Eport Promotion Councils
and the Federation of Indian
Eport Organizations (FIEO)
to be eempt from service ta
on the membership and other
fees collected by them till 31st
March 2010.
The f i rs t three measures
are continuation of incentives
announced earlier in 2008-09 as
part of stimulus measures aiming
to consolidate eport prospects.
All the measures are targeted at
improving the credit positions
of eporters. The outbreak of
the global downturn, apart from
depressing demand, has had
two other impacts. The rst of
these is a delayed realization of
payments for eporters. Indeed,
on a number of occasions,
there have been instances of
cancellation of overseas orders.
Such developments have created
considerable nancial difculties
for eporters, particularly the
small and medium ones, who have
obtained credit from financial
institutions for eecuting eport
orders. The second problem has
been a sudden drying up of tradenance due to liquidity crunches
faced by financial institutions
reducing credit availability for
eporters. Both these developments
have adversely affected credit
positions of eporters.
The interest subvention of 2
per cent was allowed earlier foremployment-intensive eport-
oriented sectors for the period
December 1, 2008 to September
30, 2009. The sectors covered
under the facility were tetiles
(including handloom), handicrafts,
carpets, leather, gems & jewellery,
marine products and small and
medium enterprises. All of these
are foreign echange earners
and labour-intensive segments
in terms of their production
organizations. Worsening of
prospects for these industries, apart
from reducing eport earnings,
also has implications in terms of
repercussions on employment.
The interest subvention can help
in addressing the credit difculties
faced by eporters from these
segments. Cost-cutting efforts
on part of producers are likely to
have resulted in retrenchments in
these segments. Credit squeeze islikely to intensify such tendencies.
Reducing obligations on pre-
shipment credit availed by the
exporters can lessen their nancial
difficulties and concomitant
enterprise contractions by some
extent. Similar benecial effects
are epected to be obtained from
etension of the ECGC cover andmarket development assistance
support. However, it must be noted
that as mentioned earlier these
are measures that will lessen the
burden of adjustment for eporters
on a purely short-term basis. It
would be foolish to epect these
measures to produce long-term
dividends.
Sof tware and e lec t ron ic
hardware eporters should be
encouraged by the announcement
of etension of the sunset clause
till the year 2010-11. These are
again sectors suffering from
depressed epor t ou t looks .
They also create considerable
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16 YOJANA August 2009
employment opportunities. To that
etent, continuation of eemptions
under sections 10A and 10B
of the Income Ta Act of 1961
will help in retention of greater
prot margins for reinvestment.
It might also encourage them
to continue in their eisting
locations of technology parks,
rather than moving to special
economic zones (SEZs). On
the other hand, allowing sports
goods, leather goods, tetiles and
footwear manufacturers to import
more duty-free raw materials
and inputs for utilization in nal
product eports will help these
industries to achieve greater
efciency at a time when they are
already affected by credit squeeze
and poor outlooks. The service
ta eemptions should also be
welcome moves for the eporting
community. The latter, however,may not be particularly happy
with the imposition of service ta
on coastal cargo movements.
Lookin Ahead
The Budget has tried to help
eporters and eport-oriented
sectors in probably the only way
in which it could have: ensuring
that the credit crunch does not
get worse. Improving access of
eporters to credit requires now
calls for commensurate measures
from the Reserve Bank of India
(RBI) in terms of reducing
interest rates on pre-shipment
and post-shipment credit. These,
however, are different issues
altogether and beyond the scope
of the Budget.
Could the Budget have done
things in a different manner? Froman eternal sector perspective and
from the narrow prism of addressing
concerns of manufacturer eporters,
it has probably done as much as it
could have. It is important to see the
steps as consistent continuation of
the stimulus measures taken earlier.
To that etent, the budget has lived
up to the current establishments
commitment of helping the affected
sectors.
F rom a more a mbi t i ous
perspective, the Budget has tried
addressing some issues that can
have important bearing upon
eport prospects from a medium-
term outlook. A critical factor
determining the outlook for Indias
eports is the need to diversify
and achieve value addition in the
product basket. Indeed, India needs
to think beyond its traditional set
of eport items and make the
relatively modern value-additive
segments more competit ive.
Agricultural eports of both
fresh and processed products
can play a critical role in this
regard. Incentivizing investments
in agricultural warehousing andstorage can augment agricultural
infrastructure and improve the
prospects of agricultural eports.
On most occasions, people do not
realize that achieving efciency
in eports has a lot to do with
reducing costs in the domestic
economy. More steps such as those
taken by the Budget with respectto incentivization of investment
in development of agricultural
infrastructure can be useful in
enhancing Indias eport prospects
in the long term. q
(E-mail : [email protected])
Exporters get a shot in the arm
In order to push the country's sagging eports, which are down by over 30 % in February-May 2009
as against the same period last year due to economic recession, The FM provided some relief to
eporters. He etended the time period for 2 % interest subsidy and insurance cover up to March
2010. He also raised the market development assistance allocation.
The interest subvention on pre-shipment credit for seven sectors, including handlooms, handicraft,
carpets, leather, gems and jewellery, marine products as also the small and medium eporters will now
be available till March 31, 2010.
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YOJANA August 2009 17
A Cautious and Restrained Budget
BudgET 09-10
T WILL not be fair to
compare the UPA led
governments 2nd budget
under the veteran politician
and administrator Pranab
Mukherjee with the one presented
by P Chidambaram during the
governments first term. When
Chidambaram presented his budget
for 2008-09 in keeping with thephilosophy that people must go
out and spend, global factors
and domestic environment were
just about right for investment
and spending. His entire taation
eercise was structured on this
principle. He rmly believed that
consumerism will fuel growth
and this country needs to be in
the comity of nations enjoyingeconomic strength and political
clout in global politics.
Switch to the 2009-10 budget
presented by Pranab Mukherjee.
The former eternal affairs minister
has not sacrificed any of these
sentiments. However, he had
I
The author is e Economics Editor, PTI News agency, contributor to Hindu Business Line and Industrial Economist and
corporate consultant on communication strategies.
This Budget isaccented towards
the rural poor, givesmarginal relief
for urbanites, andleaves industry
and stock marketdissatised. No majorprogrammes to rescue
the economy fromrecession, but there ispromise of return to
9% GDP growth
T N Ashok
a lot of handicaps to start with.
Fiscal deficit had burgeoned to
6.8%, revenue ependiture had
bloated, recession had had its
effects on industry, trade, commerce
and eports and there were poll
promises to be kept in line with the
election manifesto, a thanks giving
gesture to be gone through. Pranab
da has put in a lot of thought intohis budget eercise. He has done
the best under the circumstances.
Cautious optimism has been the
hallmark of his budget. Although
people had epected a bo lder
budget with more emphasis on
reforms, and although the absence
of any major statement on FDI and
disinvestment has disappointed
industry and the stock market, hehas made it clear the budget is
continuing eercise it is not a
one stop affairs, announcements
can be made outside of the budget
also, that he will do so when the
economic environment improves.
So there is hope for the industry
and stock markets.
OpiNiON
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18 YOJANA August 2009
The nance minister has made
massive allocations under the
NREGA programme Rs 39,100
crore to cover 4.74 crore house
holds. A Food Security Bill is in
the ofng. Massive relief has been
announced to farmers with 75% of
their overdues under debt waiverand debt relief scheme etended
to December 31 this year. There is
a committee to eamine the plight
of Maharashtra farmers suffering
under the usurious money lenders.
25 kgs wheat and rice is to be
provided for below poverty line
population at Rs 3 per kg. These
are measures clearly aimed at the
rural folk who have voted wellfor the UPA government, a thanks
giving indeed.
What about the urban population?
He has etended relief by making
marginal adjustments in the taation
slabs. He has raised the eemption
limit for majority of ta payers
at the entry level. Here is how it
works. Senior citizens benefit a
great deal as the eemption limit
gets pushed up further by another
Rs 15,000. From the eisting limit
of Rs 2.25 lakhs now it goes upto
Rs 2.40 lakhs. For women, there
is relief as the limit goes up from
Rs 1.80 lakhs to Rs 1.90 lakhs and
for the vast majority of ta payers
it goes up from Rs 1.50 lakhs to Rs
1.60 lakhs.
At a time of joblessness 60
lakh people have lost their jobs
in India due to the recession and
another 60 lakh might as well
these reliefs count a lot as they put
more money into the hands of the
people. Some ta consultants have
argued that the ta relief amount to
just about Rs 1,000 for a majority
of the people below the 10 lakh
income bracket and above the 10
lakh bracket it is a minimum of
Rs 22,415. This may have been
cause for the statement by some
that its a budget for Khas Admi and
not Aam Admi, but this is true on
the surface only. If you go deeper,
the majority relief for the above 10
lakh bracket actually come from the
abolition of the 10% surcharge on
direct taes and not the adjustment
in the taation slabs.
The nance minister has indeed
done a tight rope walking trying to
satisfy the rural population who
voted enmasse, urban population
who reposed trust, and industrywhich was supporting, eagerly
awaiting sops.
The Finance Minister has done
well to scrap the Fringe Benet Tax
(FBT). It was long overdue. FBT was
more of an irritant than an income
generator for the government. It
put the nance people of corporates
at considerable stress on how to
calculate the taes. A welcomerelief. But the Finance Minister
did not scrap the 10% surcharge on
corporate ta payers though he did
that for individuals.
Scrapping of the Commodity
Transaction Ta is another great
relief. It will promote trade on
the Multi Commodity Echanges
(MCx) where gold, silver and
other metals are traded generally.
It will also promote trade on the
NCDEx where mostly agricultural
commodities are traded in the
futures market.
The FM did not scrap the
Securities Transaction Ta prevalent
on the stock markets. Justiably so,
though many stock market leaders
, brokers and players would be
disappointed. Considering the
volume of trade is so high on the
stock echange, the government
can ill afford to lose this revenue.
Generally with so many foreign
players coming into the Indian
markets especially in the contet
of the global meltdown, because
India like China has survived the
meltdown and global recession,
it would have been an ill advised
move. The FMs budget has to be
viewed in an overall contet of high
scal decit and low growth.
Markets are sluggish, banks
are holding onto money and not
lending, creating problems forindustry, so the industry epected
bold statements on divestment in
the banking sector and measures
to promote greater inow of FDI.
It also epected the abolition of the
Dividend Distribution Ta, which is
an anomaly leading to a company
being taed twice. Certainly the
FM should have scrapped this but
he must have had his own logic and
nancial compulsions not to scrap it
as he did with other irritants.
Why no bold measures on
FDI or FII portfolio investments,
one might ask? Consider the fact
that FII investments are highly
fragile and prone to ight when
an economy weakens. So rightly
he did not want to risk any new
measures in this regard given thecurrent world economic situation.
And how would FDI come into
India even if new incentives were
announced, when most global
corporates are pulling money out
of India ( BPO and Realty sector
are good eamples) to wipe out
their debts in their own countries?
Unless they are strong at home, they
will not bring any new money into
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India. So FM has played safe and
will denitely do something outside
the budget later when the world
economic environment improves
and FDI ows can accelerate.
Industry is disappointed that the
Minimum Alternate Ta (MAT) hasbeen enhanced from 10-15%. It was
epecting some relief.
Here is the score card on the
budget of Pranab Mukherjee, the
positives and negatives together:
Direct Taes
Personal income tax exemption
limit rose favoring more women
and senior citizen ta payers whohave suffered from low interest
regime so far. Interest rates still
low hitting senior citizens living
on savings instruments.
10% surcharge on personal
ta removed. But the same not
removed for corporates
No change in the corporate tax
structure rates
FBT abolished more of an
irritant gone
Minimum Alternative Tax hike
to 15% from 10% -- a rude
shock to the industry
Indirect Taes
Excise duty increased from 4-8%
barring eceptions industry
clamors for duty reductions tomake itself more competitive,
any increase at the time of
recession does not go well.
Eporters would be the worst
hit.
Customs duty on gold bars and
other forms increased, people
hedging on ination by buying
this suffer as importers will pass
on the burden. Also jewellery
made from imported gold
will become dearer hitting the
women in this category badly.
But there is relief in abolition
of duties on branded jewellery.
Excise on branded diesel and
petrol modied. Impact has tobe assessed. But government
has appointed a high level
committee, a second time , to
advice on pricing. It wants to
align with international prices
but the full benefit of this
can be realized only when
government releases the oil
companies from the burden of
subsidies. The most subsidized
products are Kerosene and LPG.One caters to the poorer sections
and another to the middle class
housewife a path where any
government fears to tread.
There is a welcome measure in
making fertilizer subsidy nutrient
based and not price based. Also
farmers will now get the benet
directly from the government
instead of the companies.
Donations to political trusts
eempted from taes. A forward
looking measure but the manner in
which these funds would be used by
the trusts has still to be scrutinized
by the government.
A big question on the budget
that is crying for answer is how the
FM mobilizes resources to pay offfor the large allocations made under
different rural uplift schemes and
in the light of concessions given to
ta payers. The ta concessions are
all revenue neutral, there is no loss.
But the new taation measures yield
only Rs 3000 crore. Not enough.
So the FM is perhaps pegging
his hopes on the 3G spectrum
licensing process which is epected
to yield a whopping Rs 35,000
crore, disinvestment in the PSUs
NHPC and Oil India and growth to
return to 9% which will obviously
mean more production of goods
and services and therefore higher
buoyancy in ta collections.
The budget has had its share of
criticisms from several quarters.
Some have called it tepid and
unimpressive, others have criticized
it of being pro-rich and yet others
have termed it as visionless.
There have been calls for more
disinvestment and raising income
ta eemption limits to Rs 5 lakhs.
These reactions are not justified,
though. Firstly, the entire budget is
rural oriented and aimed at the rural
poor. In urban areas too its aimed to
benet the middle class. Secondly,
Its unfair to epect an FM to come
out with any bold statements at
the time of recession when stock
taking is still on. For eample,
retaining banks in the public sector
has been very sensible, given the
west's eperience with privatebanks. Raising eemption limits to
Rs 5 lakhs sounds good on paper,
but is not practical as the number
of ta payers in this category are
quite large. This is a utopian dream
capable of fruition only when India
can achieve a 10-12% growth rate.
Overall, its a budget based on
restraint and caution, addressing
immediate needs ,besides giving
thanks to rural and urban voters.
A job done judiciously under the
circumstances of recession. Now we
need to wait and watch if the FM
delivers on the promise of Direct
Taes Code, and the public debate
on Food Security Bill, and other
such progressive measures. q
(E-mail : [email protected])
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YOJANA August 2009 21
Financing Health and Education
BudgET 09-10
UDGET 2009-10 might
be perceived as having
fallen short of delivering
all that might have been
wished for in the health
and education sectors, but there
are distinct signs that the intent
is there that the Current Year
budget is the UPA II governments
first step in that direction. Thethrust had already been articulated
by President Pratibha Patil in her
June 4 Lok Sabha address. She
had then placed special stress on
education, health and infrastructure
as focus areas of the re-elected UPA
government.
HEALTH
The revised ependiture targetfor Health & Family Welfare has
been set at Rs 21,113.33 crore,
or, Rs 3,706.33 crore above last
years revised (2008-09) gure of
Rs 17,307 crore. To that should be
added the amount that Mr Pranab
Mukherjee has earmarked for
Women & Child Development; at
B
The author is Fellow, Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata.
There should
be no further
neglect of the
ways and meansof hiking domestic
productivity
and demand
in health as
well as education
Soumyakanti Mitra
Rs 7,428.00 crore, it is Rs 509.00
crore above last years revised
gure. Taken together, they might
both be slotted under Health,
in which case they add up to
Rs 28,541.33 crore, which is almost
18 percent above last years gure.
(It is instructive that last years
budgeted gures were surpassed
by the denitive revised numbers aspublished in the budget document
of July 6.)
Within health, Finance Minister
Pranab Mukherjee has accorded
special emphasis to rural healthcare
and hiked the allocation under this
head by Rs 2,057 crore. But that is
over, and above, the Rs 12,070 crore
that had already been allocated in
the Interim Budget. Indeed, Mr
Pranab Mukherjee characterized
the National Rural Health Mission
NRHM as an essential instrument
for achieving the goal of "health for
all in his budget speech.
The budge t charges the
NRHM with taking high quality
ViEw pOiNT
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22 YOJANA August 2009
healthcare to the villages. These
are reiterations of the fact that
the NRHM (launched in 2005)
remains at the ape of the UPA
governments many programmes.
It aims to continually upgrade the
availability, and access, of good but
affordable healthcare for peopleliving in distant areas.
The NRHMs salience resides
in the fact that only 4.9 percent of
the (10 percent targeted) population
has been covered for malaria
prevention. Thousands of Kala-
azar cases have also been surfacing,
as have been cases of goitre and
leprosy. For NRHM, accordingly,
disease prevention is as important
as control
The NRHM actually admits
of 18 critical states each one
of which is backward in terms of
public health infrastructure. They
are Arunachal Pradesh, Assam,
Bihar, Chhattisgarh, Himachal
Pradesh, Jharkhand, Jammu &
Kashmir, Manipur, Mizoram,Meghalaya, Madhya Pradesh,
Nagaland, Orissa, Ra jasthan,
Sikkim, Tripura, Uttarakhand and
Uttar Pradesh. New Delhi even
wants to redress imbalances in
regional health-care service delivery
by building si, additional, AIIMS-
type institutions in Patna (Bihar),
Raipur (Chhattisgarh), Bhopal
(Madhya Pradesh), Bhubaneswar
(Orissa), Jodhpur (Rajasthan) and
Rishikesh (Uttarakhand). They will
most likely be functioning by 2010-
11 and Rs 1,447.92 crore has been
earmarked for them.
The UPA IIs July 6 Budget also
epressed the intention of upgrading
13 medical colleges something
likely to be completed within the
current scal. In addition to that, the
Union Budget has set aside Rs 10
crore for the National Programme
for Prevention and Control of
Deafness (NPPCD) the advance
phase of which will be launched
across 25 districts over the net two
years. The NPPCDs objective is to
forestall avoidable hearing lossthrough advance identication and
therapy. And, Rs 100 has been the
sum allotted to institutionalise fresh
medical, non-medical and nursing
courses under professional health
ministry bodies the aim, in this
case, being to accommodate 27
percent reservation for the Other
Backward Classes (OBC).
Thanks to the budget, even the
indigenous roots of medical wisdom
are being watered. Rs 922.00 crore
is the sum of Plan and non-Plan
amounts that the nance bill has
sequestered for the health ministrys
department of Ayurveda, Yoga and
Naturopathy, Unani, Siddha and
Homoeopathy (AYUSH). That is
a 53 percent rise over last scals
revised figure of Rs 602 crore.Plus, the 46 lakh-plus Indians who
are below the poverty line (BPL)
have found a fresh dawn in the
shape of biometric smart cards.
Spread across 18 states and Union
Territories, they have been issued
the cards and, as the nance minister
said, the scheme empowers poor
families by giving them freedom of
choice for using healthcare servicesfrom an etensive list of hospitals
including private hospitals. Mr
Mukherjee went on to also say
that the Government proposes
to bring all BPL families under
this scheme. An amount of Rs 350
crore, marking 40 percent increase
over the previous allocation, is
being provided in 2009-10 budget
estimates."
Then, on the supply side of
private enterprise, Union Budget
2009-10 has been largely a relief
for the pharma industry. For one,
the sectors players are especially
glad that the ecise duty remains
constant at 4 percent. That should
please consumers too. Secondly,industry is happy because of the
weighted 150 percent deduction
that will apply to R&D ependiture
incurred in in-house manufacturing.
The main gains will be accruing
to medical education and research
since the budget sets aside Rs 1,000
crore etra for medical research
institutes. Thirdly, the customs duty
on life saving drugs stands halvedand is 5 percent now; they include
the influenza vaccine, and nine
life saving drugs recommended
for diseases like breast cancer,
hepatitis-B and rheumatic arthritis.
The duty reduction also applies to
bulk drugs which are inputs in the
manufacture of such drugs. Drugs
of this category have been rendered
free of ecise and countervailingduties.
In sum, it could be said that the
UPAs new philosophy of Outreach
characterizes the budgets planned
subventions on the health front.
There seems to be a distinct urge on
governments part to universalize
good health and take preventive
care even to the least advantaged.
That it has allocated virtually doubleto the AYUSH group of therapy of
what the sector got in last years
budget also shows its newfound
realization about indigenous
medicine. Such subventions
should promote the immigration
of additional professional talent
into these streams complementing
the contemporary developments
that are in progress.
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YOJANA August 2009 23
This might even be said to be
preventive therapy of the truest
nature; it does not spring from any
interest in commercializing either
placebos, procedures or fancy
formulations but unravels illnesses
by identifying their basic causes.
That is of a piece with the fact thatall those undergoing cosmetic and
plastic surgery will have to pay
service ta.
EDuCATION
Education is as crucial as
health for emerging India. It raises
productivity, enables new lines
of production, and lowers costs
all round. Economists would sayit is instrumental in pushing the
production possibil ity frontier
outwards (i.e., raising it) in any
given economy. And, it does so
with little, or no, etra investment
outside, apart from in human
resources.
Plainly, the UPA understands
the pivotal role of education and
the nance minister has allottedRs 29,099.21 crore to School
Education & Literacy in the
budget, while Higher Education
gets Rs 15,429 crore. That adds
up to a 19.2 percent increase
over last years numbers. To that
might also be added outlays under
three other heads Science &
Technology, Scientic & Industrial
Research and Biotechnology. IITsand NITs, for instance, have been
allocated Rs 2,113 crore out of
which the provision for new IITs
and NITs amounts to Rs 450 crore
(or, 21 percent). The minister also
proposed Rs 495 crore to set up
and upgrade polytechnics under the
Skill Development Mission, while
Rs 20 crore has been reserved for
new IIMs.
Mr Pranab Mukherjee also
announced prematriculation and
post-matriculation scholarships
for minorities plus Rs 25 crore
to facilitate the creation of two
etra Aligarh Muslim University
(AMU) campuses at Murshidabad
in West Bengal and Malappuram inKerala. Also, a special allocation of
Rs 50 crore was made for Panjab
University, Chandigarh.
In sum, there is a pronounced
thrust on higher education and
allocations to that segment are Rs
2,000 crore more than had been
earmarked by the Interim Budget.
The grand total of Rs 50,376.21
crore, represents an 18.5 percent
increase over last years (revised)
amount of Rs 42,509.57 crore.
Also, the gures of July 6 are well
above the Rs 34,000 crore that
had been assured the sector in last
Februarys Interim Budget.
Accordingly, there is more
for schooling and literacy, but
the growth rate of funding thoseactivities pales into insignicance
when compared to subventions
in higher education. Accordingly,
schooling and literacy got 11.2
percent more than they had been
allotted in 2008-09, but this years
handout to higher education is 36.1
percent over last years!
The only saving grace is that
school education has been awardeda new Rs 1,000 crore-plus scheme
the Rashtriya Madhyamik
Shiksha Abhiyan. Also, the new
nomenclature for the (already
eisting) literacy mission is the
National Female Literacy Mission.
The latters objective to reduce by
half the current level of female
illiteracy and to do so in three
years.
The programme is all about
setting up new schools in population
clusters bereft of school facilities
or infrastructure. Also, it aims to
provide additional classrooms,
toilets, drinking water and
disburse maintenance, and school
improvement, grants. There willbe special focus on educating girls,
plus children with special needs.
And it includes the provision of
computer education to merge the
digital divide.
Even eisting schools stand to
benet: The Abhiyan empowers
them to a t t ract , and re ta in ,
additional teachers and eisting
teachers get further training.
There will also be grants for
developing pedagogic material,
and strengthen the structure of
academic support at cluster, block
and district levels.
Indeed the Rashtriya Madhyamik
Shiksha Abhiyan is the governments
ape programme for attaining the
Universalization of ElementaryEducation (UEE) in a time bound
manner. That is as mandated by the
86th Amendment to the Constitution
of India, which makes education for
children between the ages of 6 and
14 compulsory and free. Also, the
scheme being implemented in
partnership with State Governments
aims at covering all of India
and responding to the needs of
19.2 crore children in 11 lakh
habitations.
The above, in fact, denotes
the UPAs significant mindset
change in relation to elementary
education. For, while there may be
no striking increase in allocations
for elementary education, Rs
1,143 crore has been set aside
for a new scheme which is to
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function along the lines of the Sarva
Shiksha Abhiyaan and provide
for a secondary school within 5
km of every residential area. That
should catalyse the building and
commissioning of the 6,000 model
schools within the current scal
year; after all, they were announcedin 2007.
Finally, poor students are to be
helped in pursuing costly technical
courses through a government
scheme that awards them full
interest subsidy during the
period of moratorium one year
from completion of the course or
si months from joining a job,
whichever is earlier.
Clearly, the governments
initiatives, both in health as well
as education, denote distinct thruststowards outreach and inclusion
and uplift of the hitherto neglected.
But, equally clearly, the backlog is
too big to be quickly cleared and
the government needs to plough
in much more funds before it can
claim to make a dent.
Above all, the current recession
and its fallout in terms of the global
e