Last chance for real reforms

There is a view that this Budget is the ‘last’ opportunity for the UPA-2 to take ‘tough’ decisions on ‘reforms’, such as easing inflow of FDI

Will the outcome of the Assembly elections cast its long shadow on the Union Budget for 2012-13 which will be presented by finance minister Pranab Mukherjee on Friday? It is unrealistic to expect Budget proposals to be made in a political vacuum. The annual presentation of the Budget of the Government of India is much more than a bland statement of the assets and liabilities, profits and losses of the world’s largest democracy. It is much more than an accounting exercise. The announcement of the Budget proposals is an occasion that not only provides an opportunity for the government to indicate the future direction of its economic policies and programmes, but also to make important statements of political intent.

The political economy of the Budget for the coming financial year (that ends on March 31, 2013) has become rather murky and difficult to predict. The world economy remains in a state of turmoil with Europe in recession. Oil prices have gone up, partly on account of US belligerence towards Iran — this is bad news for India since we import 80 per cent of our requirement of crude oil from West Asia. The rate of growth of the domestic economy has decelerated, private investments are sluggish and the deficit has gone up as expenditure intentions have mounted, not tax collections.
There is a view that this Budget is the “last” opportunity for the UPA-2 government to take “tough” decisions on “reforms”, such as easing inflow of foreign direct investment into various sectors of the economy, including multi-brand retail and insurance, cutting subsidies on diesel, cooking gas, kerosene and fertilisers, resolving coal supply constraints for power projects, relaxing restrictions on mining and paring down the fiscal deficit which is expected to exceeded the target of 4.6 per cent of gross domestic product by at least one percentage point, perhaps more.
Those espousing such policies argue that February 2013 would be too close to the next round of general elections for the Budget to propose anything other than “populist” measures. In other words, the gung-go liberalisers are telling Pranab-babu to seize this chance of “fiscal consolidation”.
The contrary point of view is that the Congress Party is in pretty bad shape after its electoral expectations were badly belied in Uttar Pradesh and Punjab, that the possibility of early general elections cannot entirely be ruled out and that the policies of economic liberalisation followed by the Prime Minister and his aides have not only failed to revive growth — GDP growth is expected to be around 6.8 per cent this fiscal year — but also had, until recently, been unable to contain food inflation.
Consequently, with economic inequalities widening in the Indian society, the government has to try and ensure that the sharp plummet in its popularity ratings is checked — by, among other things, announcing policies and programmes for the poor, such as operationalising the right to food law, that are relatively less contentious. The current debate on the right to food is essentially about whether the public distribution system should be made universal or targeted towards a particular section of the population.
It is not just the political Opposition on the Right and the Left that perceive opportunities to revive because of the weakening of the Centre, smaller regional parties, including those that are a part of the UPA and the NDA — such as the Trinamul Congress, the Nationalist Congress Party, the Janata Dal (United), the Biju Janata Dal, the Shiromani Akali Dal, the Telugu Desam Party and others — believe the time is opportune to come together to press for greater “federalism” in the working of the country’s political economy. More importantly, what is often not evident to many is the staunch opposition to so-called market-friendly “reforms” from within the Congress itself (and which has built up further in recent times).
What then can Mr Mukherjee do under the circumstances? The choices before him are few and difficult. He cannot please all sections although he may try, even if the happiness is spread rather thinly. The big question is the extent to which he will accede to the demands of corporate captains who draw up wishlists through chambers of commerce and industry associations. Bodies like the Federation of Indian Chambers of Commerce and Industry (Ficci) and the Confederation of Indian Industry (CII) would like a higher depreciation allowance for capital equipment, removal of the surcharge and cess on corporate taxes, re-introduction of the investment allowance and removal of the minimum alternate tax on special economic zones. However, many of these suggestions go against the tenor of what has been suggested in the finance ministry’s own direct taxes code (DTC). If Mr Mukherjee indeed moves towards the proposed DTC, it will entail the withdrawal of at least part of the `5,00,000-crore-plus tax exemptions that have been given to the corporate sector.
Big business does not want an increase in excise duty and service tax rates. But if the government is serious about moving towards a common goods and services tax (which can not only unify the country’s fragmented market but also bring about greater transparency in the indirect taxes regime), it has no choice but to increase both excise duties and service taxes. What is likely is a sharp hike in the excise duty on diesel-run passenger cars — Mr Mukherjee will appear virtuous as he will say this is aimed at the rich and is also eco-friendly. He may also introduce a special slab of income tax for the super-rich (that is, those with an assessable income in excess of `20 lakh a year).
Presenting the Union Budget invariably entails walking a tightrope. How adroitly Mr Mukherjee is able to balance the demands of conflicting interest groups, including the different factions in the Congress, will be known on March 16. Will the reformer in Pranab-babu prevail over the populist? Will his Budget contain the usual homilies with little new by way of “big bang reforms”, or will there be a sharp shift in policy trajectories? Your guess is as good as mine. But this columnist’s expectations are rather muted, thanks largely to what recently took place in Uttar Pradesh and Punjab.

The writer is an educator and commentator

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