Union Budget 2009-10: A Tightrope Walk

The Union Budget 2009-10 comes at a time when countries across the world are trying to fight the impact of the worst global recession since the Great Depression. The latest IMF estimates (July 2009) projects that the world economy will experience a contraction of output by 1.4% in 2009 with the GDP of the advanced economies taken together falling by 3.8%. While the Indian economy has not experienced such severe contraction, India’s GDP growth has slowed down considerably from 9% in 2007-08 to 6.7% in 2008-09, with the growth in agriculture and manufacturing falling from 4.9% and 8.2% respectively in 2007-08 to 1.6% and 2.4% in 2008-09.

Massive job losses and pay cuts across sectors were witnessed since October 2008. A sample survey by the Labour Bureau of the Central Government suggested that over 6 lakhs workers lost their jobs between October 2008 and January 2009. That this is a gross underestimation was borne out by a survey of the Labour department of the Gujarat Government, which found that the diamond-cutting industry in Gujarat alone witnessed job losses of over 4 lakhs since the onset of the recession. Thus, the biggest challenge before the newly elected Congress led Government was to provide a substantial fiscal stimulus by enhancing government expenditure, in order to reverse the economic downturn and provide an impetus for employment generation. The Finance Minister seems to have made an attempt in that direction, although in a half-hearted manner.

Budget 2009-10: Plan and Non-Plan Expenditure

(in Rs. Crore)

	2008-09 (Revised Estimate)	2008-09 (% of GDP)	2009-10 (Budget Estimate)	2009-10 (% of GDP)	Increase in Expenditure	% Increase in Expenditure
Total Expenditure	900953	16.9	1020838	17.4	119885	13.3
Plan Expenditure	282957	5.3	325149	5.5	42192	14.9
Non-Plan Expenditure	617996	11.6	695689	11.9	77693	12.6

The budget estimate for total expenditure in 2008-09 was Rs. 750884 crore, out of which Rs. 243386 crore was allocated as plan expenditure. The revised estimates (see table above) suggest that the actual amount spent in 2008-09 was higher by Rs. 150069 crore or 2.8% of GDP. Much of this increase in expenditure was on account of non-plan expenditures, especially fertiliser and food subsidies, implementation of the sixth pay commission recommendations and interest payments on public debt. Compared to the revised estimates of 2008-09, the increase in total expenditure in Budget 2009-10 is 0.5% of the GDP, with plan expenditure slated to increase by 0.2% of GDP. Whether this increase in expenditure would succeed in stimulating the economy and reverse the downturn remains to be seen.

As far as meeting the needs of “inclusive growth” is concerned, the picture is less reassuring. The central plan outlay for agriculture has increased by less than Rs. 600 crore over what was allocated in last year’s budget. Agricultural growth has already slowed down significantly in 2008-09 and delayed monsoon has already led to a drop in acreage for major crops in the current year. The meagre increase in plan outlay will fail to reverse the slowdown in agriculture. The actual expenditure on rural employment had been Rs. 36750 crore in 2008-09, against the budgeted allocation of Rs. 14400 crore. The budget estimate on rural employment for 2009-10 is Rs. 2350 crore higher than what was spent last year. Given the increase in the minimum wage provided in the NREGA to Rs. 100 announced in the budget speech, the magnitude of increase in allocations does not suggest any further expansion of rural employment programme. Moreover, the promise made by the CMP of the previous UPA Government to extend the employment guarantee to the urban areas seems to have been forgotten.

Budget 2009-10: Select Heads of Expenditure

(in Rs. Crore)

	2008-09 (BE)	2008-09 (RE)	2009-10 (BE)
Elementary Education	19777.50	19488.62	19682.96
Secondary Education	5139.70	4056.79	6470.20
National Rural Health Mission	10786.25	10799.52	12529.00
Integrated Child Development Scheme	5665.20	5665.20	6026.30
Social Security for Labour	1187.63	1387.58	1318.90
Rural Employment	14400.00	36750.19	39100.00

The insignificant increase in the budgetary allocation on school education shows that the commitment to increase public spending on education to 6% of GDP has been abandoned for all practical purposes. Even while the Right to Education Bill is about to be tabled in Parliament, the lack of adequate allocations on school education implies that the Central Government intends to shift the financial burden on to the state governments. The allocations on important welfare programmes like the rural health mission or the ICDS also point towards the waning concerns for the aam admi. At a time when the workers are bearing the brunt of the economic slowdown through job losses and wage cuts, it was expected that the newly elected Government would expand the social security scheme for the unorganised workers, who comprise over 92% of the workforce. However, the allocation on social security for labour has actually been reduced over what was spent last year.

The fertiliser subsidy bill has witnessed a very sharp increase in 2008-09, owing to the drastic increase in international fertiliser prices. Against a budgeted allocation of Rs. 30986 crore, the revised estimate on fertiliser subsidy is Rs. 75848 crore for 2008-09. While the Finance Minister has talked about a shift to a “nutrient based subsidy regime” in the budget speech, the allocation on fertiliser subsidy in the budget is Rs. 49980 crore for 2009-10, which implies a reduction of over Rs. 25000 crore from what was spent last year. This significant reduction in the fertiliser subsidy bill will not be possible without increasing fertiliser prices. If the farmers have to eventually pay more for fertilisers, due to change in the subsidy regime, it will only serve to aggravate the already grim agrarian situation.

In keeping with the proposed Food Security legislation promised by the Government, the Finance Minister in his budget speech talked about providing 25 kgs of foodgrains at Rs. 3 per kg to all BPL families. However, the 2.5 crore families identified as the “poorest of the poor” are already entitled to 35 kgs of foodgrains at Rs. 2 per kg under the Antodaya scheme. The 4 crore BPL families, who are covered under the Antodaya scheme, are entitled to 35 kgs of foodgrains. Therefore, the announcement of the Finance Minister amounts to an increase in the price of foodgrains by Re. 1 per kg for the Antodaya families and a cut in the allocation of food quotas by 10 kg for both the Antodaya and BPL families. Besides the squeeze in the entitlements of the existing beneficiaries, a food security legislation based on the current official poverty estimates would also fail to include a large section of those who are actually poor and malnourished. The Economic Survey notes that 60.5% of India’s population spends less than Rs. 20 per head per day. A meaningful approach to food security would have to begin by vastly widening the scope of obtaining subsidised foodgrains through the PDS. The increase in the allocation on food subsidy by around Rs. 9000 crore does not reflect such an approach.

Tax revenues have fallen short of the budget estimate of 2008-09 by around Rs. 60000 crore. The tax-GDP ratio has fallen from 12.6% in 2007-08 to 11.8% in 2008-09, mainly on account of the shortfalls in excise and customs duties. A series of direct and indirect tax concessions were provided in the wake of the global economic crisis, which has led to a big increase in tax expenditures. According to the Statement on Revenue Foregone laid alongwith the budget, tax expenditures have reached a whopping figure of Rs. 4.18 lakh crore in 2008-09 from Rs. 2.85 lakh crore in 2007-08. Rather than withdrawing these concessions to enable greater resource mobilisation, much of these concessions have been extended.

The abolition of the Fringe Benefit Tax (FBT) and Commodities Transaction Tax (CTT) will also adversely impact tax mobilisation. Disturbingly, the Finance Minister has provided tax breaks for laying gas and oil pipelines and production of natural gas in a way, which may disproportionately benefit the Reliance Industries Limited. The only significant effort to mobilise additional tax revenue in the budget is the increase in the Minimum Alternative Tax levied on corporates from 10% to 15% of their profits. The sum total of the tax mobilisation effort is that total tax revenue in 2009-10 is estimated to be only around Rs. 13000 crore more than what was realised last year, which will imply a further fall in the tax-GDP ratio to 10.9%. Thus the improvement in the tax-GDP ratio achieved during the tenure of the previous UPA Government has been mostly undone.

The budget expects to mobilise around Rs. 44000 crore more in non-tax revenues in 2009-10 than what was raised last year, out of which Rs. 35000 crore is expected to be raised through the sale of 3G telecom spectrum. The very projection of this large amount of revenue has confirmed the scam during the previous UPA Government’s tenure, where 2G licenses and spectrum were allocated to preferred companies on a “first come first served” basis at throwaway prices causing losses to the exchequer to the tune of nearly Rs. 1 lakh crore. Not only did the previous Government make no effort to review the allocation of the 2G licenses and recover the lost revenues, the same Minister responsible for the scam has been rewarded with the Telecom portfolio under the present dispensation. Whether the revenue target through the sale of 3G spectrum would be met is therefore uncertain.

While the Receipts Budget mentions only Rs. 1120 crore as budget estimate for disinvestment proceeds for 2009-10, the advocacy for ‘people’s participation’ in the disinvestment programme contained in the budget speech suggest that a much larger plan is on the anvil. However, the budget failed to cheer the stock markets because the budget speech did not mention any substantial target for disinvestment. The Economic Survey had specifically suggested that Rs. 25000 crore should be set as an annual disinvestment target.

It is not that the Finance Minister has completely ignored the Economic Survey. For instance, he implemented the suggestion to abolish the FBT and CTT. But he did not do away with the Securities Transaction Tax, which the survey had advocated (only the purchase and sale of equity and derivatives by the NPS trust have been exempted from STT). The budget speech also avoided mentioning “reform” measures like increasing the FDI cap in the insurance sector, amending the Banking Regulation Act or allowing greater foreign capital in the banking sector, which were explicitly prescribed by the Economic Survey. Rather the Finance Minister chose to say the following: “Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago - on 14th of July, 1969 - appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.” It is well known that the previous UPA Government had done everything possible to reverse the public sector dominance of India’s financial sector and enhance foreign capital in the banking and insurance sectors. It was only the dogged resistance by the Left Parties, which had held the government back. While the global financial meltdown has forced the Finance Minister to fall back on “socialist” wisdom, his assertions seem to have ruffled quite a few feathers in the stock market.

The projected fiscal deficit of 6.8% in Budget 2009-10 has especially come under fire from rightwing quarters. The global recession and the growth slowdown in India has forced the Government to jettison the stringent deficit reduction targets set by the FRBM Act and allow the fiscal deficit to grow to 6.2% in 2008-09 from 2.5% as estimated in last year’s budget. This abandonment of fiscal conservatism is indeed a positive development. In fact most countries across the world are expanding their deficits in order to fight the recession, with the fiscal deficit in the US crossing 12% of GDP for 2009. Although the self-serving financial interests remain hostile towards enlarged government borrowing and public expenditure, the global recession has rendered their opposition to expansionary fiscal policy irrelevant, at least for the time-being.

In sum, the Finance Minister seems to have walked a tightrope; trying to provide a half-baked stimulus to the slowing economy and make a few gestures to the aam admi even while catering to the demands of the “reforms” constituency; the corporates, stock market players and the affluent sections. This perhaps reflects the very nature of the 2009 election mandate, which has brought the Congress led Government to power. How long can such tightrope walk be sustained is a different question altogether.

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