Divestment to the rescue

Budget 2010-11 rolls out the roadmap to implement GST and DTC from next fiscal

But for the raising of excise duty on petrol and diesel, Union Budget 2010-11 proposals appear to be non-controversial. The almost across-the-board increase in excise duty to 10% and expanding the slabs attracting lower tax rates are baby steps towards implementing the 12% Goods and Services Tax and the Direct Tax Code with a peak personal tax rate of 20% without exemptions from 1 April 2011 and also to demystifying the budget as a routine balance-sheet presentation. After the havoc caused to the nation’s finances by election-eve yojnas and farm loan write-offs in the 2008-09 budget and the fiscal stimuli to insulate the economy from global recession, Pranab Mukherjee was expected to roll back the excise duty cuts to repair the fiscal imbalance as the economy was expected to close the current fiscal with a higher growth, of 7.2%, than anticipated. The automobile, IT, real estate, and several infrastructure related sectors including cement and steel had bounced back from their 2008-09 lows. On the flip side were concerns about the fragile nature of global recovery and straining inflation. Worries of a blowout from some debt-ridden European countries and rising food grain prices due to deficient southwest monsoon narrowed the scope for taking one-time action to restore financial health. Yet doing nothing would have bogged down the efforts for inclusive growth, implying increased spending on rural economy, education and infrastructure. Not surprisingly, the finance minister has cautiously raised the excise duty by 2% on most non-petroleum products, while maintaining the focus on farmers and the urban poor.

Helping the finance minister was PSU divestment, raising Rs 25000 crore in the current fiscal, which, this column had predicted (see CM, Jan 25-Feb 07, 2010), would lead to a moderate tax regime and a buoyant market. As a result, the market focused on the lower fiscal deficit estimate of 5.5% of GDP in 2010-11 as against the revised fiscal deficit of 6.9% for the current year did not seem bothered about the impact of the increase in excise duty on the fast-growing automobile sector, which has been one of the drivers of the revival. Nor did investors give much thought to the fallout of the increase in Central excise duty by Re one per litre on petrol and diesel as the ground was prepared before hand with buzz on hike in petrol and diesel prices by Rs 3 to Rs 5 per litre to reflect the rising crude oil. As such the restoration of basic import duty on petroleum products could be meaningless. Even without the duty, imports would have been expensive compared with the local subsidised products unless the government is set to quickly implement the Kirit Parikh Committee report on deregulating the petroleum industry. Club the rise in refined product prices with the government’s intention of providing cash subsidy to PSU fertiliser and oil marketing companies to show these liabilities in fiscal accounting, bringing eight more services in the tax net, and more disposable income in the hands of nearly 60% of the tax payers.

The mixture could be a recipe for triggering inflationary pressure or fuelling growth. Increased consumption, so necessary to spur economic expansion, could lead to asset bubbles as seen during the heady growth days of 2006-09. The government, however, seems confident that Budget 2010-11 would boost growth rather than inflation. The finance minister’s balancing act hinges on better tax compliance striking out lower direct tax rates. Non-plan expenditure is only 6% more than that of 2009-10. Moreover, the net market borrowing of the government, the budget claims, would not crowd out private borrowings. This implies divestment in 2010-11 as a source separate from budgetary allocation to undertake the social programs so essential for all-round growth. Nonetheless, in a globalised economy, it is not only management of internal factors such food security and a safety net for the poor that determine GDP expansion and cost of living. Flow of foreign capital, for instance, decides if a country will see a slowdown or high interest rates. A healthy balance sheet is a crucial but not the only criterion to make a country an attractive investment destination. If this was so, China would not have to pump up its economy with massive liquidity. As seen during the last couple of years, even events outside the government’s control can spoil the party. India’s growth decelerated on global risk aversion. For the finance minister’s gamble to pay off, India needs not only good monsoons but also consolidation of US economic recovery.