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A seasoned politician, equally at ease with economic and political matters of state, Union finance minister Pranab Mukherjee has sent out feelgood signals while charting an opaque course of action in a zero-sum budget. The politics is easily explained: four states are set to go to polls within three months. As for the economics, Pranab serves up some neatly packaged lip service to balancing the books, riddled with assumptions. Given that this is the second full budget of UPA-II, Pranab's reluctance to pursue a bold reforms path to tackle the twin challenges of governance deficit and inflation is inexplicable—and inexcusable.
We were told otherwise. Ahead of the budget session, in a televised press conference, Prime Minister Manmohan Singh had sought to assure the nation that the 2011-12 budget would establish his government's commitment to the path of reforms for a high rate of inclusive growth, without giving scope for corruption. Even Pranab began his budget speech with all the right noises, even saying he was aware that the biggest reforms are the ones "concerned with the details of governance". Did the veteran minister, then, lay out the roadmap to the "second generation" of reforms?
On the contrary, many critics feel that the budget is not very different from the UPA's earlier ones, trying to maintain economic growth momentum instead of focusing more on rural incomes. "Budgetary allocations should not be a zero-sum game, where if you give more to health or education, you give less to food or NREGA," says Harsh Mander, a member of the NAC. Similarly, concerns about governance and corruption have been acknowledged, but there are no indications of how investors and consumers are going to be reassured.
"The finance minister is biding his time without doing anything," says economist Ashok V. Desai, who is upset that the budget has completely ignored inflation, "indicating it is not a macro-economic problem". Supporters of the budget, however, feel it is wrong to expect policy pronouncements in what is supposed to be a statement of government intent on how it is going to manage the finances. "The budget is not the place for details. The finance minister has highlighted concerns on governance on which the concerned ministries will have to act," says C.M. Vasudev, non-executive chairman of HDFC Bank and former finance secretary.
 "The main thrust of this budget's plan is based on the belief that you can isolate economic growth." Harsh Mander, Social activist |  "It's a very inflationary budget in terms of its silences. A technocratic fix won't work for a socio-economic problem."Jayati Ghosh, Professor, JNU | |
 "Concerns about governance, corruption have been voiced so they don't have to do anything about it." Ashok V. Desai, Economist |  "A measurement of outcome in all flagship programmes is needed, but has not been done deliberately." N.C. Saxena, Member, NAC | |
 "The budget is betting on high growth to bail out India. The revenue projection does not seem unrealistic." Pratap Bhanu Mehta, Centre for Policy Research |  "Outcome budgets started in 2005. But ministries have been recording outputs instead of outcomes." Sushma Nath, Finance Secretary | |
Striving to spread resources across innumerous heads, it is in the lack of details that Pranab's budget fails to satisfy most. On inflation, there is no short-term respite, particularly on the food front. As D.K. Srivastava, director of the Madras School of Economics, warns, "There are major macro risks to inflation, mainly arising from global pressures. Crude prices are going up and signs are they will persist there for some more time. Agriculture commodities are also showing signs that they will remain high for next six months."
Given the 80 per cent dependency on import for crude oil and 50 per cent for edible oil and pulses, it seems unlikely that prices will calm down soon in India. Contradicting this assessment, finance secretary Sushma Nath points to initiatives being taken under Krishi Vikas Yojna to boost farm production in pulses, oilseeds or nutrition-rich cereals. "Already we are witnessing higher growth in pulses and edible oilseeds. These farm initiatives will help to bridge the demand and supply gap," she tells Outlook. Admitting to concerns on the global price trends in agri commodities, she clarifies that "we rely more on domestic production". On the crude oil front, the government is hoping prices will dip.
Calling it a "very inflationary budget in terms of its silences", Jayati Ghosh of Jawaharlal Nehru University is particularly concerned about the budget's failure to address the issue of growing fuel subsidies, which are likely to escalate sharply, given the global price volatility. Environmentalists have been urging the government to lift diesel price control. On the other hand, there are many who feel the government should lower customs and excise duty on crude and petroleum products—these bring windfall revenue for government when global prices go up. No answers are forthcoming.
Pranab's resolve to push ahead with fiscal consolidation and contain government borrowing has been welcomed, though how exactly it will be achieved—given the multitude of uncertainties and pressures on government expenditure—remains unanswered. Nonetheless, the finance minister's prescription to not put pressure on savings through additional government borrowing has been lauded, as it would ease pressure on interest rates and inflationary factors.
The big-ticket taxation reforms are also in the works. The Goods and Services Tax (GST) and Direct Tax Code will require separate legislations, as the budget has indicated. "There are some signals (on revenue generation) in the right direction but they are not comprehensive enough in leading up to structural reforms that are being promised (through GST or the DTC)," says Parthasarathi Shome, chief executive of think-tank icrier and a tax reforms expert.
On the socio-economic front, some forward-looking proposals, like the much-debated conditional cash transfer of kerosene, LPG and fertiliser subsidy to the BPL category of beneficiaries, have similarly brought forth a mixed response. Announcing plans to use the UID platform to roll out the programme in phases from 2012, the budget merely says yet another committee has been constituted to work out the modalities. The quantum of subsidy to be doled out to each household and how and who will identify the BPL beneficiaries are yet to be sorted out. The government is banking on cash transfers to be expenditure-neutral.
Given the widespread errors of exclusion and inclusion—with around 60 per cent of BPL beneficiaries being left out, or holding APL cards, while half the PDS cards are held by the rich—nac member N.C. Saxena wonders how the number identity will protect rights of the deserving. "Technology can facilitate, but not bridge gaps in governance. Unfortunately, there is no performance-based incentive to improve the outcome of flagship government programmes," he says. Many share his fears of continuing leakages of funds from government programmes, particularly subsidies, unless these basic governance issues are resolved. "The government thinks it can solve everything with the UID. You cannot go in for a technocratic solution to what is essentially a socio-economic problem," says Jayati Ghosh.
Swelling trouble Prices of foodgrain and vegetables have pushed inflation up. (Photograph by AP)
On issues related to reaching food subsidy to the poor more efficiently, the budget has no answers. It is among several key problems on which the 2011-12 Budget raises concerns—the provision for food subsidy has been lowered from Rs 1,64,153 crore in 2010-11 to Rs 1,43,570 crore for 2011-12. Does that mean the unresolved debate on the quantum of food and whom to cover under the proposed 'Right to Food' legislation will continue? It seems so, considering also the lower allocation made for improving the pds network.
Cash transfer of fertiliser subsidy is another area where the budget sheds no light. "It has interesting politico-economic dimensions, as the government will have to decide who should get it and what formula should be used," points out Pratap Bhanu Mehta, chief executive, Centre for Policy Research. At the heart of the issue is not just who should get subsidy, but also whether it is possible to leave out the rich or to provide subsidy to farmers who are working on leased land.
On another front, the government promise of trying to push through more than half-a-dozen financial sector legislations, some of which have lapsed and have to be reintroduced, are crucial if we are to reach the goals of inclusiveness in banking, insurance and pensions. The intent to usher in more financial sector reforms has sent the right signal to the market which, after an initial flip-flop, has moved to higher levels. The pending bills have been debated, altered and approved by several committees and groups of ministers—it's about time they are pushed through.
The budget may have voiced concerns about lagging infrastructure investments and a desire to raise the share of manufacturing from 16 per cent currently to 25 per cent in a decade, but it has failed to address issues of how the government proposes to do so in the absence of any solution to the land acquisition and rehabilitation issues. Lip service to environment and climate change apart, there is no direction on how the path to sustainable development is going to be charted. Even as Pranab prays for a bountiful monsoon year after year, funds for the accelerated irrigation programme show little progress on the ground.
Indeed, it is not the lack of resources that is hindering agriculture or social development programmes like education, ICDs or the rural health mission. "There are huge amounts of money available but the system is still clogged like drains, just the same as 30 years back," says Renana Jhabvala of SEWA. Then, you have measures like the five per cent service tax proposed on diagnostic labs and AC, 25-bed hospitals, knowing fully well that 80 per cent of the people depend on private sector healthcare. Such measures only compound the anger from a budgetary exercise that dulls the vision.
| Key Promise | Performance | Reality check | ||
| Double rural credit, ease farmers' debt burden | Farm loans made available at 7%; it's 4% for those with a good payment record. Loan waiver of Rs 60,000 crore in Budget 2008-09. | Agriculture growth remains slow, monsoon-dependent. Credit reforms are piecemeal. No clear roadmap for MFIs. | ||
| Employment guarantee on demand | NREGS expanded to entire country, wages linked to inflation. | Restricted to rural areas, scope of works limited to goverment whims, corruption remains high, and employment still to be made available for 200 days. | ||
| Raise public expenditure on health to 2-3% of GDP over five years | Allocation for health and family welfare has hardly increased from 0.32% of GDP in 2010-11 to 0.34% in 2011-12. Doubling salaries of angandwadi helpers should improve service delivery. | Given the gaps in health infrastructure, the resources and manpower to meet unmet challenges remain inadequate. | ||
| Gradually raise public expenditure on education to at least 6% of GDP | Primary education is now guaranteed for all children by the UPA. Budget 2011-12 allocation of Rs 52,060 crore is 24% higher than FY 2010-11. Allocation made for pre-matric scholarship for SC/ST students. | Allocation to education is still far too short of target. Poor quality of primary education is another cause of concern. | ||
| Raise tax-GDP ratio and expand tax-paying base | VAT has been introduced and the tax-GDP ratio has been rising. | GST rollout plans delayed by two years as Centre- State differences persist on the modalities. While administrative reforms are welcome, tilt from direct taxes to indirect taxes not seen as prudent strategy. | ||
| Strengthen public distribution system, especially in the poor and backward districts | The central government has practically given up on this enterprise. | After various pilots involving smart cards and re-drawing of lists of entitlements, government set to move on conditional cash transfers from 2012. Future of PDS remains uncertain. | ||
| All regulatory institutions will be strengthened to run professionally | The Competition Commission of India was set up—but is not effective. | There has been a systematic collapse in effective regulation either due to interference of ministries or operation of cartels across all sectors. | ||
| To control escalation in prices of essential commodities | Global and domestic factors see huge rise in prices of essential commodities in the last four years. | Besides blaming external factors and demand growth, the government has left it to the RBI to control inflation. | ||
| To encourage and actively seek FDI | FDI limits have been relaxed in an array of sectors, though some like multi-brand retail are still closed. Inflows have come down from all-time highs to $27.6 billion this year. | Concerned about dip in FDI inflows, the government has promised to soon push through several financial reforms legislations. | ||
| To provide a corruption- free, transparent and accountable government | RTI Act implemented in November 2006. Budget 2011-12 looks to overseas entities and technology infusion to check black economy and book culprits. | Despite pressures from vested interests, RTI Act remains a moderate success, having helped unearth many scams. Wait for Lok Pal Bill continues. Corruption at all levels of public sector dealings has skyrocketed. | ||
| To ensure at least 7-8% annual GDP growth and generate employment | Pranab Pranab has managed to ensure over 8% annual growth against all odds. | Lagging behind on most social development indicators, India may be too late to capitalise on its demographic dividend. | ||
| To eliminate revenue deficit by 2009 | Since 2006-07, the fiscal targets are not being met. Budget 2011-12 makes a serious attempt to reduce non-Plan expenditure. | Results will be visible only in the long run, provided the government takes the right steps to improve governance and bring accountability. | ||
By Lola Nayar with Pragya Singh and Arti Sharma
| ALSO IN THIS STORY |
 INTERVIEW The ICRIER head finds enough to cheer about—with caveats—on taxation reforms | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 OPINION It's the missing link between prudence, pork-barrel politics | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BUDGET 2011-12: PERSONAL FINANCE OUTLOOK MONEY Outlook Money offers a primer to make the most of these testing times. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 OPINION Social priorities have received scant fiscal attention | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 OPINION The FM has been boldest in plugging social sector leaks
 ILLUSTRATION BY SORIT OPINION Welfare Must Walk The Talk Social priorities have received scant fiscal attention There is good reason to feel let down by this year's budget for the advancement of social sectors. The disappointment is more given that the Union finance minister opened his speech by stating that "we are reaching the end of a remarkable fiscal year" and followed it up by immediate assertions that "growth in 2010-11 has been swift and broad-based", that "the economy is back to its pre-crisis growth trajectory". After acknowledging that "there is much that still needs to be done, especially in rural India" and that "the implementation gaps, leakages from public programmes and the quality of our outcomes are a serious challenge", he assured us that he does "not foresee resources being a major constraint, at least not in the medium term". From here on, the mystery deepens. What are the social priorities? What is the fiscal strategy? Where are we headed? This year's budget fails to provide answers to these vital questions. The fiscal intent of this year's budget does not match many national, or even governmental, social priorities. Take child under-nutrition, the levels of which continue to be unacceptably high. At the first meeting of the prime minister's national council on India's nutrition challenges in November 2010, all agreed that the Integrated Child Development Services require strengthening and restructuring. A decision was taken to prepare a multi-sectoral programme to address maternal and child malnutrition in 200 selected high-burden districts. The budget is silent on how this new pledge will be fulfilled. The increased allocations by a paltry Rs 615 crore, much of which will be absorbed by the well-justified and much-needed doubling in the remuneration of women anganwadi workers and their helpers, is vastly insufficient to fund the ambitious blueprint for strengthening and restructuring ICDs.
Take health. It is well known that low public spending on health leads to impoverishment, inadequate public provision, poor reach, unequal access, poor quality and costly healthcare services. With private out-of-pocket spending on health accounting for 78 per cent of total health expenditure (incidentally, it is 61 per cent in China, 54 per cent in Sri Lanka and 36 per cent in Thailand), close to 90 per cent of Indians—not just the poor—have very little financial protection. The additional allocation to health reveals no intent or strategy of providing comprehensive quality primary healthcare and financial protection for all. Again, take sanitation. Despite the fact that over 50 per cent of Indians defecate in the open, the Total Sanitation Campaign gets an additional allocation, over and above the revised estimate for 2010-11, of only Rs 70 crore. Similarly, the reduced allocations for nrega by Rs 100 crore—down from the revised estimate of Rs 40,100 crore for 2010-11 to Rs 40,000 crore for 2011-12—despite the indexation of wages to inflation is not consistent with the government's priority to provide employment guarantee for the poor. The disappointment over the budget proposals this year is particularly high because India can so easily use the acceleration in growth rates to rapidly expand social opportunities for all. A budget should honestly respond to the concerns of the voiceless, not just lobbyists. This one doesn't. A budget should be visionary and inspirational; this one plainly isn't. The author is member, NAC; advisor to UNICEF, India; and visiting professor, ISB, Hyderabad.
FILED IN: AUTHORS: A.K. SHIVA KUMAR TAGS: BUDGETS | BUDGET 2011 | SOCIAL WELFARE SCHEMES SECTION: BUSINESS SUBSECTION: OPINION  JITENDER GUPTA INTERVIEW 'GST, DTC Should Follow Global Norms' The ICRIER head finds enough to cheer about—with caveats—on taxation reforms LOLA NAYAR INTERVIEWS PARTHASARATHI SHOME ICRIER head Parthasarathi Shome finds enough to cheer about—with caveats—on taxation reforms in Budget 2011. Excerpts from an interview with Lola Nayar: Tilt towards indirect taxes: By not having net revenue measure, the finance minister has emphasised that he wants more revenue from indirect rather than direct taxes. In the short run, this is not the greatest idea. You should emphasise more on direct taxes as our economy moves forward, and expand the income tax base. Seeking revenues: The finance minister is relying on high rate of taxation growth of 24.9 per cent next year. Some of it is obviously coming from GDP growth— the nominal GDP growth is about 15 per cent but he is getting 26 per cent nominal revenue growth so there is real revenue growth of 10 per cent. The FM must be depending a lot on administrative measures together with buoyancy growth...one should be given a little more indication of how all this has been derived. Administrative tax reforms: Main reforms that have taken place are in the administrative area, which we usually don't talk about. By advancing electronic filing, by sharpening the electronic TDS mechanism, by helping the low income-tax payer, by processing refunds much faster, by having a major computerised programme for customs processing—these are very important advancements which are the result of many years of spade work. These are crucial reforms. Need to broaden MAT base: Bringing SEZs under the Minimum Alternate Tax (MAT) is a bold, reform-oriented move. It would be important in a reform sense to look at what is in the MAT base and how are you defining it as you want the corporates to pay on their broadest base. But base-broadening of MAT hasn't taken place. Another area of micro short-term reforms is in customs and excise duty exemptions. Out of excise duty, Pranab has withdrawn exemptions from 130 consumer goods. Also, he has brought in professional services under the ambit of services tax.
FILED IN: AUTHORS: LOLA NAYAR PEOPLE: PARTHASARATHI SHOME TAGS: TAXATION | TAXES (VAT ETC.) | INCOME TAX | BUDGET 2011 SECTION: BUSINESS SUBSECTION: INTERVIEWS |
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