For an economy maintaining near 9% annual growth in the past five years (8.7% to be exact) but on the brink of losing its high pace, with inflation raising its head again after a brief spell and its agriculture deteriorating over the years, has the Budget 2008-09 come as its best hope or something different? As the economy strayed beyond its potential growth rate for some time, monetary authorities have been trying to bring the economy back to its potential growth path through monetary tightening. Has the budget queered the pitch or aided the process?
The measures announced in the budget appear to have been like the doctor prescribing the exact medicine for the sickness. The general reduction in CENVAT and reduction in excise duties on specific products have been chosen most appropriately to have the maximum impact in the context of a slowdown in manufacturing growth. While retaining the peak customs duty for reasons of rupee appreciation, customs duties on project imports and certain material inputs were reduced to boost domestic production and investment. Fiscal stimulus was quite necessary in the context of fall in external demand arising from global slowdown and appreciation of the rupee. The massive relief on personal income tax through raising the exemption limits and adjusting the income slabs has been a long-pending reform finally accomplished. This will provide additional boost to domestic demand to compensate for the fall in external demand and the monetary-policy driven decline in domestic demand.
The most significant announcement in the budget, however, has been the loan waiver scheme for farmers who have defaulted on their bank loans estimated at Rs. 60,000 crores. This, while freeing the debt-stricken farmers, points towards cleaning of the balance sheets of the affected banks. While no provision has been made in the budget for this, this would definitely involve burden on the exchequer at least to the extent of interest on off-budget bonds that may be created for the purpose. The budget also has not included any provision for meeting the 6th Pay Commission pay raises along with arrears from 2006 for the central government employees.

Revenue estimates appear to be realistic except for the non-tax revenue, where its growth is put at a low 2.6% in 2008-09 against 12.2% in 2007-08 (TABLE). ‘Other receipts’ show a big jump to Rs. 10165 crore from just Rs. 500-600 crore in the previous two years showing government’s new resolve to undertake substantial disinvestment of government equity in public enterprises. The expenditure numbers appear to be huge underestimates. Revenue expenditure growth will be much higher than growth of 11.8% indicated in the budget. The assumed growth of capital expenditure of 8.8% is too low in comparison with the growth of 24% in 2007-08. Consequently, revenue deficit and fiscal deficit is bound to be much larger than the 1% and 2.5% respectively of GDP as shown in the budget. In short, while the budget indicates further movement towards fiscal consolidation, in fact, it may not turn out to be so.
MATHEW JOSEPH