Saturday, February 27, 2010

Budget 2010: Cheers to middle class, jitters for 'aam admi'

he elephant has been synonymous with India from time immemorial, through history, mythology and belief. For decades, the Indian economy, too, came to be likened to an elephant, but in a pejorative, lumbering sense. Today, as the balance of global power shifts to the East, and India is regarded with awe for weathering the financial storm better than most, the elephant analogy is back – but with the positive attributes of size, stability, solidity and strength. With our economy projected to become the second largest in the world, after China and ahead of even the US, there’s a growing sense that we’re riding a quiet but powerful giant, one that needs to be taken care of if we want it to travel far and carry over a billion people on its back. Just as the elephant-god is worshipped by millions as remover of obstacles and bearer of good fortune, our Budgets are awaited with a prayer that they will lead us to a better tomorrow. Will this Budget make a difference to our lives, will it help the elephant dance?

NEW DELHI: When finance minister Pranab Mukherjee presented the interim budget last year on the eve of elections, the phrase 'aam admi' figured five times in his speech starting with the opening paragraph. In his latest Budget speech on Friday, the aam admi figured only twice and had to wait till well into the speech to be invoked.

Is this more than just trivia? It might well be. The salaried middle class can celebrate an entirely unexpected windfall of up to Rs 56,000 per annum from the reworked personal income tax slabs and a new tax exemption option. Most Indian corporates have reason to be happy with the surcharge on corporate tax coming down from 10% to 7.5%, even if some among them will be unhappy about the minimum alternate tax (MAT) being hiked from 15% to 18%.

Reformers will welcome the declaration of intent implied in a disinvestment target of Rs 40,000 crore for the coming year — and another Rs 14,000 crore in the one month left in this year — and the assertion that the return to fiscal rectitude has begun with the deficit being pruned to 5.5% of GDP. The proposal to issue new banking licences to the private sector after a gap of over 10 years should also please business groups that have been hankering for entry into the sector.

In contrast, the aam admi might wonder why the 'flagship' rural employment scheme (NREGS) has been given just 2.5% more than in last year's budget and the ambitious Bharat Nirman has got just 6% over the budgetary allocation last year. In real terms, adjusting for inflation, both would amount to a cut in outlays.

The aam admi is also hardly likely to be pleased with the hike in fuel prices by way of excise and customs duty increases on crude oil and petroleum products — which alone are estimated to yield the government an additional Rs 26,100 crore in the coming year. This is bound to stoke fears of further inflation. The fact that excise duty hikes are more or less across the board — in a partial exit from the stimulus package rolled out through late 2008 and early 2009 — does not help.

Mukherjee's announcement that excise duty on petrol and diesel will go up by one rupee per litre prompted what might well be the first-ever boycott of a budget speech, or a part of it, by the Opposition. That's a sign that these parties believe they can gain some political traction on the issue.

True, the middle class too will not be spared the impact of these duty hikes, which the FM later insisted would directly raise the inflation rate by just 0.4%. It can also point to the fact that the extended coverage of service tax to things like domestic air travel and under-construction houses will do it no favours. But it would be difficult to dispute that on balance the Budget has saved more money for this section than it has taken away.

As for corporates, the 175-point rise in the Sensex on the day was a fair indicator of how the markets perceive the overall impact of the Budget on India Inc. While excise duty hikes are never good news for industry, the much lower-than-expected borrowings of the government — projected at Rs 3.45 lakh crore — means business need not fear being either crowded out of the credit market, or being hit by the kind of rise in interest rates that a larger borrowing programme would have meant by increasing the demand for credit.

The FM is clearly betting on growth to help him raise revenues on the scale he expects, while the fact that the pay commission arrears and farm loan waiver are no longer a millstone around his neck has helped enormously in keeping expenditure from rising too much.

The direct tax changes for individuals and corporates, he said, would cost him Rs 26,000 crore over the year, while the excise, customs and service tax changes would get him an additional Rs 46,500 crore, thus yielding a net Rs 20,500 crore. On the corporate tax front, a higher MAT will fetch him Rs 6,000 crore, while lower surcharge will lose him Rs 5,000 crore — a modest additional burden of Rs 1,000 crore on India Inc.

Mukherjee said in his speech that the proposed move to a goods and service tax (GST) would have to wait till April next year and that he would also introduce the proposed new direct tax code, which is premised on lower rates with fewer exemptions, from April 2011.

Later in the day, he told a TV channel that while he was sure about the introduction of the direct tax code next year, since that was within his purview, GST coming into force would require the concurrence of the states and hence was something he couldn't guarantee.

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