Before discussing the budget it is useful to recall that the new government has in power for a little over one month. A new government takes time to find its feet. This is even more so for a coalition government in which the coalition is coming to power for the first time. In this background the most likely outcome (as we wrote and said to the media) was some general reforms to promote growth and some actions to implement the new emphasis in the CMP on the poor, agriculture, employment and social issues. The Central government budget covers three aspects. Further all budgets since 1991 have had a mix of continuity with some change. This is what we have in fact got. The government will take perhaps 3 to 6 months to fully find its feet after which we can expect greater changes. The FM has in fact promised more tax reform in his next budget.
The budget consists of three parts; General policy reform, expenditures and revenues including tax revenues and taxation issue. Most areas that The CMP highlights as constituting the “human face “ of its reform strategy (agriculture, social sectors) largely fall within the constitutional purview of the State governments. The central government can influence outcome by laying out a road map or vision and through the allocation of plan expenditures and persuasive powers of the Planning Commission. This is what the budget tries to do. There are also some policy reforms that come under the purview of the Central government (essential commodities act, food Act, food regulator) and these have not been touched yet. The budget focuses on areas of critical importance to agriculture such as Water, technology, connectivity, credit, agro-industry and crop diversification and tries to integrate, modify and fine tune programs to give them a new direction. It carries out a similar exercise for the social sectors such as basic education and health, and socially disadvantaged persons. It has also increased overall plan allocation and promised further programmatic reform after the planning commission carries out a thorough review. Though the proof of the pudding will be in the eating, we expect more purposeful action to follow after the this review by the new Planning Commission, given the Prime Minister’s emphasis on governance issues and efficiency of expenditure.
The budget also gives clear reform signals aimed at fostering investment and growth. Sceptics have been silenced by the unambiguous proposal to raise FDI limits in Telecom from 49% to 74%, in Civil Aviation from 40% to 49% and in insurance from 26% to 49%. This follows the earlier cabinet proposal to move ahead with respect to private entry into up gradation and management of the Delhi and Mumbai airports with FDI up to 49%. Decisive implementation of this prior decision is more important the futile quibbling over limits. Removal of 85 items from the list of goods reserved for SSI also gives a clear signal that economic reforms and employment generation are not incompatible. This has been proved by China becoming the factory of the world (for labour intensive manufacturing) in precisely those item that had for so long been reserved in India. Another reform step that lays to rest to a great extent earlier fears about a collapse of the dis-investment program is the setting up of a Board for restructuring of Public sector enterprises. This board will consider all aspects objectively including the possibility of sale, closure and dis-investment.
On the Tax side the picture and the signals are mixed. Tax reform message is given by the bold move to a true CENVAT that integrates goods and services. The first step has been taken to convert the service tax, which is a turnover tax into a VAT type tax by allowing offset for taxes paid across both goods and services. The FM has also taken on the Steel producers lobby that had successfully kept the customs duty rate on steel way above the customs duty on all other metals such as aluminium, copper, nickel and tin, by reducing the import duty to 10% and related duties to 15%. The distortion introduced last February by reducing CENVAT from 16% to 8% has also been partially corrected.
On the other side of the balance sheet are the removal of the textile sector from CENVAT, the changes with respect to capital gains and turnover on securities, the method of reducing personal income tax for those with income below Rs. 1 lakh. Even if these are successful in the short term they will come back to haunt the FM in the long term, though he retains the option of correcting them in the next budget or the subsequent ones.