THE IDEA OF INDIA

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Monday, July 6, 2009

Budget 2009-10 : Will Bharat Smile while India waits for non-budgetary incentives

Annual Budget is an exercise of stock taking therefore highly contextual; yet the balancing act it has to perform is not only in terms of revenue and expenditure, but need to address a number of dualisms that confronts Indian economy - for example, short and long term goals, rural and urban economy, agriculture and industrial (service) sectors, dualism of labor markets where 90% of labor force is in informal or unorganized sector, government versus private sector initiatives and not the least - Social Sector - so called people’s sector versus other formal sectors of the economy. Thus it is not a simple balancing line crossing, rather a number of such lines which are not parallel and the multiple crisscrossing in the web called National budget is not easy to confront with.

The contextual reality is that India is facing the heat of global economic downturn; and it would be futile to take solace in still positive growth of 6.3% in 2008-9 compared to near zero or a marginal global growth. What is important is not the level of GDP growth, but what incremental growth is achieved during the previous year; and a growth deceleration of about 3.0 % or so, does translates in to innumerable formal and informal shocks the corporate as well as general public is facing. One sure consequence is a broad based increase in unemployment but more specifically retrenchment of skill labor employed in selected export led industrial/services sectors where migrant and women labor has suffered.

The Budget 2009-10 presented this morning in many ways is a carried forward of the interim budget, but not much is added in terms of the ‘big bang’ second generation reforms nor strategy to plug a very high fiscal deficit of 6.8% which alone is 40 % of the total budgetary allocation and note that this amount is not on hand yet that spending will take effect immediately. Often upto one-third of allocations is never actually appropriated and spent thus the effecting need of fiscal deficit will be much smaller. Although the tax to GDP ratio is declared at 11.5%, the proceeds are far too inadequate to ease the interest payment worth 4% of GDP and the inevitable expenditure on defense worth another 2.5% of GDP.


This is budget with high fiscal deficit with no indication of from where this money will be brought in, limited direct tax incentives, no indication that domestic demand will be fired through fiscal and monitory incentives and there is no roadmap of disinvestment targets. However, while more details are awaited, what can be stated from the presentation of the finance minister is a focus on Bharat – meaning a focus on the common man beginning from a resolve to make agricultural sector rebound to a 4% growth; and there is also an emphasis on a number of infrastructural investments which can push both employment generation and augment rural markets. A 45% increase in allocation to projects under Bharat Nirman are noteworthy; further Rs. 325,000 cr or 5.45% of GDP worth funds are promised to be made available mostly from banking channels for agricultural credit at about 7% rate of interest. The farmers loan waver scheme is also extend further.

There is an emphasis on infrastructural development beginning from power development to development of rural roads and housing in both rural and urban areas especially through the Indira Ahwas yojana and JNNURM linked projects. The biggest gainer in this budget is the NREGA which has an allocation of Rs. 39,100 crores yet measures up to only 0.66% of GDP. This amount if fully spent will comfort millions of households especially by promoting employment of women. But since the NREGA wages are increased to Rs. 100/- nationally, a number of wage labor households may in fact net lower than expected annual income through wages since they may not migrate to urban or high wage rate areas due to availability of NREGA work. Thus the NREGA is a double edge apparatus, while on the one side it feels cool and nice on the other it can harm innovation and risk taking behavior.

Allocation to education programs including SSA and mid-day meals appear on the expected direction, but what is important is to ensure improving the quality of public education especially at the primary and elementary level which is not forthcoming in the budgetary allocations. The age old PDS is at its first year of getting redundant through a new program of providing 25 kg cereals at Rs.3 per kg for the BPL families. This program can only succeed if the BPL families are intelligently and correctly identified, and there is nothing which suggests that such a situation is achievable given over four decades of unsuccessful implementation of PDS. Whether ‘universal ID’ scheme can be put in place is yet to be seen and I am not yet hopeful on this innovation.


On the whole, agricultural and social sectors soaps are subject to implementation efficiencies and partnerships of the states; both are in the danger zone, therefore not much can be built upon these announcements yet. Besides, roads, markets and communications are drivers of the Indian economy but what has to be remembered is all this investment will be of no use if there are no users, for example what will you do by building mega infrastructural structures if there are no users and cost recovery. Having said that, the Indian growth story is going ‘ga-ga’ about the role of domestic demand; and given the global recession, it is indeed that capacity of the Indian citizen both in rural and urban areas to ‘fire the market’ so to speak that is the key for growth for the year 2009-10, but there is a week indication of this happening in the current budget.


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Crores of Rs. % GDP
Total Plan Exp 325,000 5.45
Fiscal Deficit 6.80
Revenue Deficit 4.80
Tax-GDP ratio 11.50
Interest payment 236,000 4.0
Defense expenditure 141,702 2.38
Selected social sector allocations 105,079 1.76
Total Budgetary allocation 1.020,838 17.1
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