The Finance Minister laid down three objectives as the focus of the 2010-11 budget: raising the economy�s growth rate quickly to the pre-crisis 9 per cent level, making that growth inclusive, and moving towards fiscal consolidation. However, the measures announced in the budget may not contribute to growth nor make that growth more inclusive and may not even lead to fiscal consolidation. The achievement of these objectives is likely to be thwarted by the inherently inflationary nature of the budget. Finance Minister Pranab Mukherjee in his budget speech, while noting that high inflation in food items had already spread to non-food sectors has, of course, expressed the hope that the steps taken by the government so far will bring the rate of inflation down in the next few months. The question is: will it?
The firm effort at fiscal correction is the hallmark of this budget. The budget went by the guide map prescribed by the Thirteenth Finance Commission and proposed to bring down the fiscal deficit sharply from the revised estimates of 6.7 per cent of GDP in 2009-10 (6.9 per cent after including the off-budget bonds) to 5.5 per cent in 2010-11 and further to 4.1 per cent in the next two years. A hefty rise of 18 per cent in gross tax receipts (against less than 5 per cent rise in the 2009-10 revised estimates), a 32 per cent rise in non-tax revenue (less than 16 per cent in 2009-10) and large receipts from public sector disinvestment (Rs.40,000 crore against about Rs.26,000 crore in 2009-10) are expected to bring about strong fiscal adjustment in 2010-11. On the expenditure side too, strong adjustment is envisaged with revenue expenditure growth coming down to below six per cent from 14 per cent in 2009-10. Interestingly, capital expenditure is targeted to grow quite strongly at 30 per cent in 2010-11 on top of a similar growth of 28 per cent in 2009-10.
The budget made substantial changes on the tax front through which the Finance Minister expects to reverse the revenue trends of the current year. Corporation and income tax receipts grew reasonably well in the current year at 18-19 per cent. For 2010-11, corporate tax collection is expected to grow at 18 per cent with a small reduction in surcharge from 10 per cent to 7.5 per cent and an increase in the rate of minimum alternative tax (MAT) from 15 per cent to 18 per cent. Personal income tax rates have been brought down on different income slabs, lowering receipts by Rs.26000 crore. This is estimated to lead to a 3.5 per cent decline in collection. With the restoration of import duties on crude and refinery products, customs receipts are estimated to rise by a large 36 per cent against a 15 per cent decline in 2009-10. A partial rise in general excise duty rate by two per cent and other upward adjustments of specific duties on cement, petroleum products and tobacco products are estimated to raise the excise duty collection by a huge 29 per cent against a six per cent decline in the current year. While retaining the rate of service tax at 10 per cent, the budget proposed extending the service tax to new sectors such as property construction, rail freight and air travel. This is estimated to raise service tax receipts by 17 per cent as opposed to a decline of five per cent in 2009-10. The adjustments in indirect taxes are targeted to bring in additional revenue of Rs.46500 crore.
There is little doubt that the taxation proposals are inflationary � the indirect tax measures will lead to higher inflation through a cost push effect and direct tax measures through demand pull. Both these imply that the magnitude of inflationary pressure implicit in the budget is Rs.72500 crore or 1.2 per cent of GDP. The possibility of another petroleum price hike, manifested in the very low petroleum subsidy provision of about Rs.3100 crore is likely to stoke inflation further.. High inflation hurts the poor more and makes growth less inclusive.
High food inflation has been the main factor driving the overall inflation rate. It is apparent that India has hit a food constraint that has not only driven up prices but that also threatens to limit its growth potential. That the finance minister acknowledges this is evident in his budget speech, which outlined a four-pronged strategy to boost agricultural growth. However, most of the measures announced are likely to bear fruit only in the medium and long run. Besides, the measures announced do not make for an agricultural reforms agenda that tackle the problems caused by government control over inputs, production and marketing � an agenda that is critical to ease the food constraint. There is also little in the budget to indicate an effective short-term food inflation management strategy.
In short, the budget has pushed for fiscal consolidation too hard, hoping that it would help restore the pre-crisis growth trajectory but the tax measures it resorted to for achieving fiscal correction could unleash an inflationary spiral which could harm both growth and the inclusiveness of that growth and also make it difficult to achieve fiscal consolidation.