Budget Aug 09 Vol 53

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YOJANA August 2009 1

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Ast 2009 Vo 53

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Let noble thoughts come to us from every side

Rig Veda

(Circulation) : pdjucir_ [email protected]

GROWTH, INCLUSION AND RISK ....................... ..................5

Subir Gokarn

FISCAL PROFLIGACY WITH OVERALL DIFFIDENCE .......8Ravindra H Dholakia

THE BUDGET AND ExPORTS: DOING WHAT ITCOULD HAVE ..........................................................................13Amitendu Palit

A CAUTIOUS AND RESTRAINED BUDGET .......................17T N Ashok

FINANCING HEALTH AND EDUCATION ........................ ....21Soumyakanti Mitra

TAxES AND THE BUDGET ........................ ........................ ....25

TOWARDS FASTER RECOVERY..................... .....................28

Jayanta Roychowdhury

IN THE NEwS .......................................................................32

AGRICULTURE AND THE BUDGET ....................... ............33

Surinder Sud

BUDGET AND ENERGY ........................ ........................ .........38Vijay Thakur

ExPANSION WITH INCLUSIVE GROWTH ................ .........41

K R Sudhaman

DO YOu KNOw? ..................................................................45

G-20: A NEW BEGINNING......................................................47

Anindya Sengupta

BEST PRACTICES A NURSERY PLAYINGMANY ROLES ..........................................................................51

Shabana

URBAN INFRASTRUCTURE DEVELOPMENT

IN INDIA ...................................................................................53

Prem Pangotra

SHODH YATRA A MAN WHO WOULD GO TO SUN ....57

COMPETITION LAW AND POLICY: INDIAN

CONTExT .................................................................................59

Amit Singh

FLORICULTURE OPPORTUNITIES FOR INDIA .................62

Kiran Kumar P, Jayasheela

PROTECTING A SACRED GROVE ..................... ...................65

Ram Kumar Bhakat

J&K wINDOw .....................................................................68

BOOK REVIEw ....................................................................71


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2 YOJANA August 2009

FLAgSHIP PROgRAMMES

Bh a r a t N i r m a n

programme launched

in 2005-06 with its

si schemes viz. rural housing,

irrigation potential, drinking

water, rural roads, electrication

and rural telephony is an important

initiative for bridging the gap

between the rural and urban areas

and improving the quality of life

of people, particularly the poor, in

the rural areas.

1. Pradhan Mantri Gram Sadak

Yojana:

The Pradhan Mantri Gram

Sadak Yojana (PMGSY) is

one of the most successful

programmes under Bharat

Nirman. The allocation for this

programme has been raised by

by 59% over BE 2008-09 to

Rs.12,000 crore.

2. Indira Awaas Yojana:

Under the Indira Awaas

Yojana (IAY) for construction

of 21.27 lakh houses, Rs.

8,795.79 crore has been

released till March 31 2009

and 21.05 lakh houses have

been constructed during

2008-09. The Indira Awaas

Yojana ( IAY) is proposed to

be increased by 63 per cent

to Rs.8,800 crore in Budget

Estimates 2009-10. To broaden

the pace of rural housing, FM

has proposed to allocate, from

the shortfall in the priority

sector lending of commercial

banks, a sum of Rs.2,000 crore

for Rural Housing Fund in

the National Housing Bank

(NHB).

3. National Rural Employment

Guarantee Scheme:

NREGS, which was launched

on February 2, 2006, in 200

most backward districts in the

first phase, was epanded to

330 districts in the second phase

during 2007-08. The remaining

266 districts were notied on

September 28, 2008, and the

scheme has now been etended

to all the districts of the country.

More than 4.47 crore households

were provided employment

in 2008-09. A budget of

Rs 39,100 crore has been made

for NREGA, which is an increase

of 144%.

4. Raj i v Gandhi Grameen

Viduytikaran Yojana:

R a j i v G a n d h i G r a m e e n

Viduytikaran Yojana (RGGVY):

Under the Raj iv Gandhi

Grameen Vidyutikaran Yojana

(RGGVY), which is continued

during the Eleventh Five

Year Plan, 59,882 villages

have been electrified and

connections to 53.78 lakh BPL

households have been released

(up to 31.3.2009). propose to

allocate Rs.7,000 crore to this

yojana which represents a 27

per cent increase over 2008-09

(BE).

5. Irrigation:

Bharat Nirman aims to

create 10 million hectares

of irrigation capacity by

2 0 0 9 t h r o u g h m a j o r ,

m e d i u m a n d m i n o r

projects complemented by

groundwater development.

6. Drinking Water:

55,067 uncovered and about

3.31 lakh s l ipped-back

habitations are to be covered

with provision of drinking

water facilities and 2.17 lakh

quality affected habitations

are to be addressed for water

quality problems. Under Bharat

Nirman for rural water supply

Rs. 6,441.69 crore in 2007-08

has been utilized. In 2008-09,

a budgetary provision of Rs.

7,300 crore had been made out

of which Rs. 7,276.29 crore

(almost 100 per cent) has been

utilized.


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Abot the Isse

I

t is etremely rare for a Union Budget in this country not to raise debatesand discussions. Despite the fact that budget is not the only platform forannouncing economic policy decisions, despite also the fact that usually

more such policy announcements are made throughout the year than on thisparticular day alone, this annual event continues to attract an etremely keenfollowing. And justiably so, for the annual budget reects the intent of thegovernment, offers an insight into the country's nancial health, sets the tone forfurther policy decisions and charts out the general roadmap that the developmentcaravan is likely to follow during the year. For an economy battling the impactof a global economic downturn , this roadmap charted out by the governmentassumes special signicance.

The Budget for 2009-10 has been presented at a time when much of the developedworld is hit by recession. The downturn has hit trade, commerce and industry in the country, brought down

growth rates, thrown people out of jobs and put a question mark on the future of development projects. Intimes of such stress, the average Indian, as well as those who run businesses, rightly turn to the governmentfor solution and epect initiatives that can help the economy regain its foothold. Especially so, when thegovernment has just come back to power, strengthened by a clear majority in the general elections.

Against this backdrop of economic compulsions and raised epectations, the Budget 2009-10 has triedto address the three major challenges facing the economy - to revive the 9 per cent GDP growth rate atthe earliest, to deepen and broaden the agenda for inclusive development, and to energize government andimprove delivery mechanism. As a short term measure for steadying the shaky economy, the governmenthas stepped in with a huge spending of Rs 10.21 trillion directed largely at public projects and ta relief. Theidea is to propel growth by increasing demand. Allocations have been raised for the Flagship Programmes ofthe government, the Rural Development sector, Infrastructure, Education and programmes directed towards

the weaker and poorer sections of the society. This year's budget was a really difcult balancing act betweenhuge demands on one hand and very restricted choices for raising ta revenue on the other.

Given this fact, many feel that this was the best the Finance Minister could have done under the circumstances.However, there will always be critics who feel that the budget could have shown more scal discipline bykeeping the scal decit low. The Economic Survey has meanwhile indicated signs of recovery for theeconomy. As such, the government can also take this into consideration while setting its agenda. The articlesinside bring you opinions from eperts about how the budget has treated the different sectors.

Opinions will always remain divided. Only time can tell how the economic management of the country shapes upover the year, and whether the roadmap charted out by this budget is actually able to lead us out of this economicdownturn. q


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A Bdet for the Aam AAdmi

Environment and climate change

l Allocation for the Bharat

Nirman Schemes raised by 45

per cent.

l National Rural Employment

Guarantee Scheme (NREGS)gets 144 per cent more,

l Pradhan Mantri Gram Sadak

Yojana (PMGSY) 59 per cent

more,

l Raj iv Gandhi Grameen

Viduytikaran Yojana (RGGVY)

27 per cent more and

l Indira Awas Yojana (IAY) 63

per cent more than last year.

A sum of Rs. 2,000 crore

has been allocated for Rural

Housing Fund.

l A new scheme, Pradhan

Mantri Adarshgram Yojana

(PMAGY) will be launched

this year on a pilot basis for

integrated development of

1000 villages with above 50

pe r cent Scheduled Cas te

population.

l Stress on the formation of

women Self Help Groups

l In furtherance to National Action Plan on Climate Change, eight national missions representing a multi-

pronged long-term and integrated approach to be launched.

l National Ganga River Basin Authority set up. Budgetary allocation under National

l River and Lake Conservation Plans increased from Rs.335 crore in B.E. 2008-09 to Rs.562 crore in B.E.

2009-10.

l Special one-time grant of Rs.100 crore given to Indian Council of Forestry Research and Education,

Dehradun.

l Rs.15 crore each to be allocated to Botanical Survey of India and Zoological Survey ofIndia. An additional

amount of Rs.15 crore to be allocated for Geological Survey of India

(SHGs). Along with capital

subsidy at an enhanced rate,

in terest subsidy to poor

households to be provided for

loans upto Rs. 1 lakh from

banks.

l ANational Mission for Female

Literacy to be launched

l The Swarna Jayanti Gram

Swarozgar Yojana (SGSY)

to be restructured as National

Rural Livelihood Mission to

make it universal in application,

focused in approach and timebound, for poverty eradication

by 2014-15.

l A new scheme, Rajiv Aas

Yojana will be introduced to

make the country slum free in

the next ve years.

l The Budget commits that all

Integrated Child Development

Services will be etended to

every child under the age of si

by March, 2012.

l The allocation for the Ministry

of Minority Affairs has been

increased by 74 per cent. The

Budget has made allocations for

the new schemes of National

Felloship for Stdents from

minority community.

l A new project is being launched

for modernization of the

Employment Echanges to

enable job seekers to register

on-line from anywhere and

approach any employment

echange.

l The Government proposes

to bring all BPL families

under the Rashtriya Swasthya

Bima Yojana (RSBY). The

allocation for the scheme is

being increased by 40 per

cent.

l Draft Food Security Bill to be

put on the net soon for public

debate and consultations.

The proposed National Food

Secrity Act will ensure thatevery family living below the

poverty line in rural or urban

areas will be entitled by law

to 25 kilos of rice or wheat per

month at Rs. 3 a kilo.


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Growth, Inclusion and Risk

BudgET 09-10

HE UNION Budget for2009-10 was presenteda g a i n s t a c o m p l e backdrop. There was theinescapable reality of theeconomic environment.

Growth in the Indian economyhas slowed considerably evenas much of the world has gone

into a pretty deep recession. Thegovernment has been respondingto the situation, but was obviouslysomewhat constrained by theelectoral cycle. This budget wasthe first opportunity to mount asystematic and concerted effortto get things back on track. But,beyond the short-term considerationof offsetting the slowdown, therewere several long-term factors

prominent in the backdrop. Aftera decade, the composition of theruling coalition had swung sharplytowards single-party dominance.This raised epectations of a lesscontested policy agenda, whichwere reinforced by the largelyreformist intentions articulatedin the Presidents Address toParliament and the even more

T

The author is Chief Economist, Standard & Poors Asia-Pacic.

The size of

the overall scaldecit as well as

the increase indisposable incomes

should help stabilizeeconomic growth this

year, while layinga foundation for

acceleration next year

Subir Gokarn

ambitious Economic Survey for2008-09.

In my view, the Budget didnot live up to these epectations.Like many people, I was hopingto hear a strong and clear messageabout the many measures thatthe government would take tofurther its inclusive growth agenda

and then to see specific budgetinitiatives placed in this contet.The Finance Minister was carefulto point out that the Budget was notthe only policy statement that thegovernment would make, so one

must not assume that it dened theboundaries of the agenda. We canwait and watch for more to happen.Nevertheless, the opportunity tocreate a policy contet for the now

certain ve-year term that a rst-year budget provides should havebeen used more effectively.

However, if one had more modestepectations from the Budget, viz.,what it it actually going to do forthe economy in the short term, thenone had virtually no reason to bedisappointed. Nothing in it will do

OpiNiON


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any harm and several things may doa lot of good. Of course, loomingover this rather benign view is asignificant risk of a fiscal blow-out. In what follows, I make briefassessments of the Budget proposalson the basis of four sets of criteria:

Growth, Infrastructure Development,Inclusion and Fiscal Discipline.

groth

There are no two ways about it: a

scal decit of 6.8 per cent of GDPwill provide a growth stimulus. Therecent signs of a turnaround in theeconomy are, in my view, largelydue to the stimulus that was providedtowards the end of 2008 by way of

implementation of the Sith PayCommission recommendations.Over the past few months, this hascontributed to a surge in sectorssuch as consumer durables, andsome automobile segments. Moredeficit spending by governmentwill clearly reinforce this tendency.More pointedly, the Budget has

signicantly incentivized consumerspending by means of the abolition

of the personal ta surcharge andlifting of ta liability thresholds.The initial impact of these measureswill obviously be skewed towardsconsumer goods, including the twosegments referred to above, but if themomentum that is generated sustains,it will spill over into others throughlinkages. At the very least, the size of

the overall scal decit as well as theincrease in disposable incomes shouldhelp stabilize economic growth thisyear, while laying a foundation foracceleration net year.

Infrastrctre Development

The Budget scores reasonablyhigh on this front. Allocations tomost of the infrastructure ministries,which will implement projects, haveincreased substantially, in many

cases accelerating in comparison

with the previous year. The powersector, perhaps the weakest link in the

infrastructure chain, was given about

46 per cent more money than in the

previous year. Urban development

has also been given significantly

more money under the umbrella of

the JNNURM. These are all veryre-assuring, but even at the risk of

be-labouring the point, the economic

impact of these allocations, both in

the short term and the long term, will

be when they are actually spent.

In an environment in which

private investment, both domestic

and foreign, will be reluctant to fund

long-gestation greeneld projects,

the role of public funds becomeseven more critical. The epansion of

the capacity of IIFCL to intermediate

funds from the banking system to

infrastructure projects will also

help. Ultimately, however, solid,

commercially viable projects have

to be available. This requires more

diligence and co-ordination on

the part of several government

agencies at the central, state and local

government agencies. The intentionto set up key project monitoring

mechanisms is an important step

in facilitating this and they must be

initiated as quickly as possible.

Inclsion

The NREGS is clearly perceived

by many people, within and outside

government, to have played a stellar

role in the re-election of the UPA.Even with its limited coverage

and concerns about inefficient

implementation, it offered several

millions of people a safety net thatjust did not eist before. Securityagainst complete deprivation is afundamental component of inclusionand the intent of governmentto broaden the programme and

hopefully make it more efcient is

clear from the signicantly larger

allocation made to it. On the otherdimensions of inclusion, viz., healthand education, it is striking thatthe allocations have not increased

signicantly over the previous year.A lot of activity in these sectors is,of course, funded by state and local

governments, but it is a bit surprisingthat the central government, whichswears by its inclusiveness agenda,should have been so conservativein its allocations. One couldargue that this simply reflectsthe governments belief that theenormous slack in the system canbe reduced enough to get a lot morebang for the buck but, here again,the issue of delivery and the several

weaknesses in the system is critical.Accompanying the at allocationsmust be a programme to rapidly

improve the efciency of delivery.

Fiscal Discipline

This is the one dimension onwhich one has to find fault withthe Budget. There is, inevitably, acontradiction between assessing theBudget favourably with respect to

growth because of the high fiscaldecit and then complaining aboutthe size of the decit. However, theconcern is not so much with the size of

the decit at this point in time, wherethe contradiction is most obvious butwith the absence of an eplicit strategy

to deal rmly with the problem as theeconomy recovers and the need for

scal stimulus reduces. An ambitiousdisinvestment target was epectedto be announced in the Budget, buteventually a very small target was set.Other sources of non-ta revenue, e.g.,the spectrum auction, are essentiallyone-time realizations. We need to seemore articulation of reforms on theta and ependiture fronts, which willconstitute a dynamic plan to reduce the

decit. That was not in the Budget.Some reassurances have come from

subsequent activity to prepare the


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ground for somewhat more substantialdisinvestment than was targeted, butuntil the money is in the kitty theproblem will not go away.

One additional source of comfortis the relatively conservativeestimates for ta revenue growth.Overall revenues are epected toincrease by a mere 2 per cent, withmost sources actually decliningrelative to the previous year. The

only signicant growth is expectedto come from corporate taeson account of the raising of theMinimum Alternate Ta (MAT)liabilities, which means that theaverage ta collections per company

will increase. The aggregateestimates appear to be somewhatpessimistic in the current economicenvironment but, consequently,the likelihood of collections rising

beyond estimates and the fiscaldecit narrowing is higher. Perhapsas a strategy it is more effectiveto set epectations low and thensurpass them rather than the otherway round. However, one cannotwish away the nervousness that the

high decit has evoked amongstinvestors; the impact it may have oninterest rates can derail the recovery

process and to that extent, decit-induced growth is a rather riskyproposition.

Speaking about reforms, thecommitment to introducing theGoods and Services Ta (GST)at the central level in 2010 is

rather ambitious but entirelywelcome. While it may take time toimplement smoothly, this is a majorreform to the ta system, whichwill incentivize all those who are

outside the ta net today to enter it.There will certainly be signicantlong-term payoffs from this in theform of a higher Ta-GDP ratio.

On three of the four criteria thatI laid out, the Budget certainly hadsome positive measures or, at least,

did no harm. However, the highdependence on a large decit to inducea quicker recovery in the economybrings with it significant risks ofhindering that very recovery throughits impact on interest rates. In a benignenvironment, with low inationarypressures and high capital inows,things may pan out as planned. Butif, for example, inationary pressuresre-emerge, monetary and scal forces

could come into conict, threateninggrowth and stability. q

(Email : subir_gokarn

standardandpoors.com)

YE-8/09/1


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Fiscal Proigacy with Overall Difdence

BudgET 09-10

N N U A L B U D G E T

i s s u p p o s e d t o b e

a c o m p r e h e n s i v e

compilation of the scal

policy statements of a

government. A pure scal policy

is any policy that directly affects

governments ependitures and

revenues. Union government in India

accounts for approimately 55% to

60% of all government activities.

Union budget is, therefore, an

etremely important statement for

the domestic and foreign business

sector who intends to do business

in or with the country.

Budget is invariably seen and

eamined in the contet of and

within the framework providedby the annual Economic Survey

prepared by the Ministry of Finance

(MoF), which tables it in the

Parliament a couple of days before

the budget. The Economic Survey

presents the SWOT (strengths-

weakness-opportunity-threat)

analysis of the countrys economy

A

The author is Professor of Economics, Indian Institute of Management, Ahmedabad.

The present

budget, ignoring

completely scal

prudence, has

chosen to provide

temporary relief

to the present

generation by

imposing

severe burden

on the future

generations

Ravindra H Dholakia

and provides policy prescriptions

for the short, medium and long

terms. Since 1991 in India,

professional Finance Ministers

(FMs) have been abiding by the

Economic Survey while preparing

the budget and in case they decided

to deviate from what was mentioned

in the Survey, they felt obliged tojustify their decision to deviate

temporarily. This background is

relevant because after 1991, for the

rst time this year, there is almost

a total disconnect between the

Economic Survey and the Budget

proposals.

State of the Indian Economy

The performance of the Indianeconomy during the year 2008-09

in terms of critical parameters

would be very relevant to eamine

the plausibility of the assumptions

underlying the calculations in the

budget. The growth of real GDP

during 2008-09 was recorded

at 6.7% compared to 9% during

pErSpECTiVE


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2007-08. This was the effect of

the global crisis and subsequent

slow down in the Indian economy.

The last quarter (Jan-March, 2009)

of the year recorded the growth of

only 5.8%, which was 0.5% point

higher than anticipated. As such

the second last quarter (Oct-Dec.

2008) of the year had also clocked

the growth rate of 5.8%. Thus,

the fall in the growth rate of real

GDP was arrested by the end of

the year 2008-09. The Prime

Minister had announced that the

worst phase was behind us and

that we had started recovering.

Moreover, in all these growthgures, the growth of agricultural

was substantially less than the

average recorded in the last 3-4

years. Current monsoon is not

very good, but is also not bad,

implying that we could achieve 3

to 3.5% real growth in agricultural

during 2009-10.

In the matter of prices, the target

of ination was totally frustrated

with a substantial unanticipated

ination driving the WPI based 52

week average inflation reaching

8.4% , CPI (Industrial Workers)

based inflation being 9.1% and

CPI (Rural Labour) based ination

crossing double digit to 10.2%.

Causes for this are well known,

but failure to contain ination wasparticularly harsh on the rural poor

because they suffer the most when

unanticipated inflation occurs.

Subsidy programmes for food,

shelter, employment, etc. have to

be viewed as efforts to compensate

rural poor for the unanticipated

inflation just as the dearness

allowance (DA) compensate the

industrial workers.

The Fore reserves stood at $

252 billion on 31st March, 2009

implying a huge net outflow of

about $ 60 billion during the year.

Most of the liquidity epansion

undertaken by RBI through

monetary policy measures during

the last year was primarily to ght

such an unprecedented drain on

liquidity created by the net outow

of $ 60 billion. However, since

April, 2009 things have started

looking up and we have already

received FII and FDI inows of

about $ 8 to 10 billion by end of

May, 2009. The echange rate that

averaged $ 1 = Rs.46 during 2008-09 showing a 15% depreciation

over 2007-08 started showing the

signs of appreciation. From the

peak of $1 = Rs.51.20 in March

2009, it has already appreciated by

6.5% in June end.

The fiscal deficit was the

greatest cause of concern. The

ofcial revised estimate of the scal

and revenue decits for the year

2008-09 signicantly exceeded the

budget estimates and stood at 6.2%

and 4.6% respectively. The FRBM

Act targets were comprehensively

missed. For the rst time in the

last 40 years, we reported a primary

revenue account decit, and that

too, of 1% of GDP, which implies

that our revenues are insufcientnot only to meet our capital outlays

and interest obligations but also a

part of our current consumption

ependitures. Fiscally, this is

a grave situation and must be

immediately addressed. It is argued

by several economists and policy

makers that once in a while such a

situation would not be unacceptable

particularly when the government

was required to pump-prime the

economy to sustain growth and

employment. However, a closer

eamination would reveal that the

real net scal stimulus provided in

response to the global melt-down

and its adverse impact on the

Indian economy was hardly 1 to

1.3% points of GDP, whereas the

fiscal slippage was almost three

times the amount. This was only

on account of scal proigacy and

cannot be ascribed to the fiscal

stimulus argument. Thus, there

was an urgent need to correct the

scal imbalance in the budget for

2009-10.

Objectives of the Bdet 2009-

10

As per the budget speech of the

FM, there are about 11 different

objectives that the budget would

address. Most of these objectives

are from the election manifesto of

the ruling party as one would epect.

However, scal consolidation orscal discipline did not gure in that

list of objectives. Essentially, the

budget would aim at (i) continuity

of the policy reforms particularly in

terms of disinvestment and focus on

infrastructural investment to make

it 9% of the GDP; (ii) stability

in terms of controlling inflation

and providing food security by

aiming at 4% annual real growth ofagriculture; (iii) prosperity in terms

of achieving 9% real growth of GDP

in the medium term; (iv) inclusive

growth in terms of targeting 50%

reduction in population living

below poverty-line by the year

2014; and (v) social development

in terms of providing employment

guarantee, social security, raising

real wages and housing to the


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needy. The FM has categorically

mentioned in his speech that a

single budget could not solve all the

problems and meet all challenges,

and that budget would not be the

only means to do so. Thus, there

would be other announcements

and off-budget policies likely to

be made periodically, which means

that this budget would not reect

comprehensive compilation of the

scal policy of the government. Like

monetary policy, now even the scal

policy would change frequently.

This in itself is not a good news

for the business sector because it

would only increase uncertaintydue to policies and would not

provide a stable environment for

the business. It can have adverse

impact on the investment decisions

of the domestic business and more

so for the foreign direct investment

by the foreign investors.

Assmptions underlyin the

Bdet 2009-10

Budget is an eercise to project

/ forecast future revenues and

ependitures. These forecasts

are always based on detailed

a s sumpt ions a bou t c ruc i a l

parameters. The most crit ical

parameters in this regard are (i)

growth of real GDP; (ii) ination;

(iii) growth of industry; (iv) growth

of eports and imports; (v) average

echange rate; etc.

The present budget has assumed

a nominal growth of GDP to be

10.05% for the year 2009-10. The

medium term targets are 12.4%

and 13% for the years 2010-11 and

2011-12 respectively. The nominal

growth of 10% in GDP consists

of the target of 6.51% growth in

real GDP and 3.32% ination rate

during the year 2009-10. Thus, we

have assumed a further decline or

deceleration in our real growth of

GDP from 6.7% achieved during

2008-09 to 6.5% in 2009-10. This

is in spite of the predictions about

reasonably good monsoon this year

compared to the last year. It seems

that MoF is not convinced about

the recovery from the slow down

and is overcautious overwhelmed

by the growth pessimism and self-

diffidence. If China, our major

competitor in this regard, is hoping

to achieve a real growth of 8% in

GDP during 2009-10, it is not onlysurprising but somewhat shocking

that we want only 6.5% real growth.

This is because Chinas dependence

on eports is more than 30% of its

GDP whereas our dependence is

not even 20%. It is well known

that these two economies have

eperienced adverse impact of

the global meld-down largely

through their dwindling eports.Since we have decided to target

lower growth net year than the

last year, our policy initiatives

and reforms during the year are

also not epected to be aggressive

accordingly. They are epected

to be slow, gradual, consumption

oriented rather than investment

promoting, and social sector based

instead of focused on economicrecovery. Most of the ependiture

proposals in the budget 2009-10 fall

under these typologies.

Ination target set in the budget

seems to be too ambitious because

it disregards past eperience and

consistency. The target of 3.3%

inflation during 2009-10 should

be compared to the GDP deator

ination and not to the WPI or CPI

ination. During 2008-09, the GDP

deflator showed 6.2% inflation.

Although the WPI based ination

during the rst quarter of 2009-10

(March to June) would be less than

1%, the CPI ination would be more

than 7 to 8%. Moreover, petrol

and diesel prices have recently

been revised upward by about 8

to 10%, which is likely to ignite

further inationary pressures in the

economy. On the other hand, the

unprecedented scal decit planned

in the budget and a huge increase

in the government consumption

ependitures provided in the budget

would only add to the inationary

pressures. It is most unlikely that

the target of containing the GDP

deator ination to only 3.3% could

be achieved.

M o r e o v e r , t h e b u d g e t

calculations on revenue generation

from personal income ta and

service ta seem to be based on an

assumed nominal growth of 9%in the personal incomes, which is

less than 10% growth of nominal

GDP assumed by MoF. Further, it

also disregards normal buoyancy of

personal income ta achieved in the

recent past. Similarly, the corporate

sector and industrial sector are

assumed to grow hardly at 3%

in real terms as revealed by the

budget forecasts of the corporate

income ta and ecise revenues.

Similarly, it seems that the customs

revenues are predicted on the basis

of a negative growth of imports in

the range of 5 to 8% coupled with

epectation of further appreciation

of the rupee by 3 to 4%.

All these assumptions made in

preparing the budget 2009-10 are


11/72


not indicating any optimistic view

of the future growth and recovery.

Rather, they suggest etremely

defensive and difdent approach

of the FM and the Cabinet and

hence provide the background for

epectations about likely reforms

in economic policies. For instance

the provision of only Rs.1,120

crores from disinvestment in the

budget against the recommended

amount of Rs.25,000 crores by

the Economic Survey makes the

intensions of the FM in this regard

clear. The actual provision of Rs.

1,120 crores from disinvestment

is less than half already achieved

in the year 2008-09, which was

the year of political strife and

controversies. Markets, on the

other hand, had epected a very

bold, aggressive and optimistic

outlook with great commitments

to policy reforms. It is, therefore,

not surprising that the stock market

crashed significantly after the

budget. As a major indicator ofthe reversal in reforms, the current

budget substant ially increased

the size of the government by

increasing the total ependitures

from 13.8% of GDP in 2008-09

(BE) to 17.4% of GDP in 2009-

10 (BE). This is only for the

union government. If we add the

states, the size of the government

would cross 30% of GDP, whichis way above the critical limit of

25% suggested by Colin Clark for

efciency and effectiveness.

Fiscal Discipline

Fiscal proigacy is the biggest

limitation of this budget. Several

economists including the present

author had suggested in the pre-

budget epectations that undue

concerns about meeting the targets

of FRBM immediately by 2009-

10 need not prove a constraint

for providing the scal stimulus

for fast recovery and return to the

growth path of 9% plus by the net

year. However, nobody could have

imagined that concerns of scal

prudence and discipline would be

so thoroughly disregarded in this

budget. The scal decit during

2008-09 increased from budgeted

2.5% of GDP to 6.2% of GDP

(Actual). This should have been

brought down to 5% or 5.5% in

this budget. Instead, it further

increased to 6.8% of GDP as perthe budget. If we add below

the line subsidies for oil and

fertilizers, the true scal decit

increased to 8% of GDP in 2008-

09. These subsidies generally

increase during the year and are,

therefore, not fully provided in the

budget. If we make reasonable

assumptions about them, the

present budget may also result inthe true scal decit of about 8%

to 8.2% of GDP. When we add

the scal decit of states, which

is allowed to increase to 4% of

GSDP in this budget, the overall

scal decit would become 12%

of GDP. This is repeated without

any efforts to control it during

this year.

Such a fiscal behaviour is

simply not sustainable. It implies a

long term debt-GDP ratio of more

than 250% and clearly points to

the impending threat of debt-trap

and eventual bankruptcy. To come

out of such a scal mess, the future

generations will have to sacrice

substantially in terms of higher

taes, higher interest rates, lower

growth and higher ination. This

would not happen if the present

fiscal profligacy was directed

towards achieving faster growth

recovery by targeting 8% to 8.5%

real GDP growth. This could have

happened with lower ependitures

and lower revenues, but with the

ependitures for investments and

capacity creation rather than for

unproductive consumption of

populist schemes and programmes

like NREGS, Mid-Day Meal,

Bharat Nirma, Indira Awas Yojana,

etc. In most of these schemes, only

temporary assets are built and a

large part of the ependitures areeconomically wasteful. This budget

is likely to lead the international

rating agencies to downgrade our

ratings thereby increasing effective

borrowing costs for us. Higher

scal decit implying a staggering

public borrowing eceeding Rs.4

trillion during the year would,

moreover, result in higher interest

rates and would crowd out private

investment leading to lower

growth potential. Further, it

would discourage foreign investors

who have already withdrawn $ 1

billion in less than 10 days after

the budget.

Thus, the present budget,

ignoring completely the fiscal

prudence, has chosen to providetemporary relief to the present

generation by imposing severe

burden on the future generations.

Elected representatives need

to ponder over whether they

have such a moral authority to

decide on behalf of the future

generations. q

(Email- [email protected])


12/72


HOw wILL THE BuDgET IMPACT

The hosehold

l Select Life Saving Drugs and

medical equipment to cost

less

l LCD TVs,

l Mobile Phones, l Branded

Jewellery,l S p o r t s a n d

Leather products,lPackaged

Software,Footwear may cost

less

l Contact lenses, toothbrushes,

man-made fabrics, set top

boes, gold and silver may

cost more.

Ta Payer

l Income-ta eemption limits

raised by up to Rs 15,000 for

senior citizens and Rs 10,000

for the general tapayer.

l 10 % surcharge for those

earning more than Rs 10 lakh

annually, removed

l Fringe Benefit Ta (FBT)

abolished

l Commodity Transaction Ta

abolished

l Wealth ta now payable on

wealth above Rs 30 lakh

instead of Rs 15 lakh

l Gifts in kind above Rs 50,000 to

become taable from October

Bsiness

l Ta wr i t e - o f f o n R&D

ependiture etended to allmanufacturing units

l Credit on Minimum AlternateTa can be carried forward for10 years instead of 7

l Section 10A and 10B ta holidayfor STPs and EOUs etended toMarch 31, 2011

l MAT up from 10 % to 15 %

l Service ta on legal consultancyto rms

The Investor

l Commodity Transaction Ta onderivatives trading abolished

l New Pension Scheme eemptedfrom I-T, Securities TransactionTa and Dividend DistributionTa

l

NPS not eempted from ta onmaturity or withdrawal.

Farmer

l The target for agriculture credit

ow increased from Rs. 2,87,000crore last year to Rs. 3,25,000

crore for 2009-10.

l The interest subvention for

short term crop loans up to Rs.

3 lakh per farmer to continue

with additional subvention of

1 per cent to those farmers

who repay such loans onschedule

l The time for paying 75% of

overdues under last years farm

loan waiver scheme etended

to 31st December, 2009. A

Taskforce being set up to

suggest action regarding some

Maharashtra farmers not covered

by loan waver scheme.

l Allocation under RashtriyaKrishi Vikas Yojna (RKVY)

raised by 30 per cent and that

for Accelerated Irrigation

Benet Programme by 75%

l Plans to move towards nutrient

based subsidy regime instead

of the current product pricing

regime for fertilizers.

Economy

l High government ependiture

aimed at creating demand and

boosting growth.

l Fiscal Deficit High, but

institutional reform measures

to be initiated to control it.

FOR YOu

COSTLIER

Set Top Boes and

Gold and silver

become dearer

Cosmetics, Contact

Lenses to cost more

Bulk Gems,

Toothbrushes will be

dearer

Man Made Fabric,

Walkman, I-Pod will be

costlier

Plastic Surgery and

Legal Fees will be

epensive

CHEAPER

Mobile Phones, LCDTV to cost less

Cardiac, Hepatitis B,

Arthritis and Cancer

Essential Drugs Care

to cost less

Sports Equipments and

Big Cars to be cheaper


13/72


The Budget and Eports: Doing what it

could have

BudgET 2009-10

HILE PRESENTING

the Union Budget for

the scal year 2009-10,

the Finance Minister

drew attention to the

significant structural changes

that have taken place in the

Indian economy over the last

decade. Reference to structural

change in the contet of the

Indian economy usually implies

the growing contribution of the

services sector to overall national

output and the stagnant role of

industry and manufacturing in

this respect. However, in the

current contet, the FinanceMinister was also referring to

the increasing integration of the

Indian economy with the world

economy. As he further pointed

out, Indias trade in goods and

services was currently estimated

w

The author is a Visiting Research Fellow at the Institute of South Asian Studies (ISAS) in the National University of

Singapore (NUS).

Incentivization

of investment

in development

of agriculturalinfrastructure

can be useful in

enhancing Indias

export prospects

in the long term

Amitendu Palit

at 47 per cent of its GDP. At this

level of integration, the eternal

sector can no longer be ignored

as a less-important contributor

to the economy compared to its

domestic counterpart.

The Backdrop to the Bdet

The Budget was presented in

the backdrop of a troubled eternal

sector scenario. The balance of

payments (BOP) estimates for the

year 2008-09 were released on June

30, 2009, eactly a week before

the presentation of the Budget.

Norma lly, Un ion Budge ts are

placed at the end of February, a timeof the year when only si months

information on BOP is available.

However, this time around the

Budget was richer in terms of

knowledge of the developments for

the whole year. These developments

pErSpECTiVE


14/72


underlined build-up of some

pressures in the eternal sector.

Under no circumstances can these

pressures be construed as pointers

towards emergence of structural

vulnerabilities. Nonetheless,

given the robust health of Indias

eternal sector in recent times, the

pathological report released by

the RBI at the end of last month

pointed to some unmistakable signs

of stress.

The main imbalance was

noted in the proportion of the

current account deficit withrespect to the Gross Domestic

Product (GDP). At 2.6 per cent

of the GDP, the current account

deficit was perhaps larger than

what most had epected. Current

account deficits higher than 2.0

per cent of GDP tend to bring

back uncomfortable memories of

1988-89 to 1990-91 the period

when India encountered the most

serious eternal sector crisis in

its independent history.

The year 2007-08 had ended

with a current account decit of

1.5 per cent of GDP. However,

most had not epected the world

to suffer such a choking slowdown

in 2008-09. They had also, in a

similar vein, not epected the

global downturn to inict as much

impact on Indias eternal sector as

it had. This is where recognition

of Indias trade integration with

the world economy assumes vital

importance. The effects of the

downturn, admittedly, have not

been pervasive and across-the-

board. At the same time, theres

no denying that greater global

integration has resulted in India

facing the consequences of a sharp

contraction in global trade.

A steep drop in merchandise

eports has led to a swelling of the

trade decit, which has eventually

risen to 10.3 per cent of GDP at

the end of 2008-09. The current

account decit would have certainly

eceeded 3.0 per cent of GDP had

the invisibles surplus (7.7 percent of GDP) not compensated

a considerable part of the trade

decit.

T h e h i g h t r a d e d e f i c i t

underscored a sharp deceleration in

growth rates of both merchandise

eports and imports. Merchandise

eports grew by only 5.4 percent in 2008-09 (on BOP basis)

compared with a far higher growth

of 28.9 per cent in 2007-08. The

growth deceleration in the current

year was entirely an outcome of the

eport compression eperienced

during the second half of 2008-

09 with eport growth turning

negative (-20.0 per cent) during

the period. Imports also showed a

negative growth of -16.6 per cent

during the second half of 2008-09.

The negative growth in imports

was particularly pronounced in

the fourth quarter (January-March)

of 2008-09 when the domestic

industrial slowdown manifested

in a sharp cutback in production-

related imports.

Bdeted Measres

From a trade perspective, the

priorities for the Union Budget were

quite clear from the outset. The

Budget had to address the primary

concerns of eporters. However,

in this regard, it is important to

understand the limitations of the

Budget. The Budget is not an

eercise in trade policy. By itself,

it can contribute to stimulation of

demand within the economy bysetting in motion an investment-

income multiplier. However, it is

helpless in stimulation of eternal

demand the lifeline for eports.

A revival in demand for Indias

eports depends upon the recovery

in main eport markets, primarily in

North America and Europe, which

still appear to be some distance

away. The Budget therefore could

have contributed only in alleviation

of some of the specic concerns

of eport-oriented industries and

eporters that were essentially of a

non-demand nature.

This is eactly what the Budget

has tried to do by announcing thefollowing steps for restoring eport

growth:

l Adjustment assistance scheme to

provide enhanced Eport Credit

and Guarantee Corporation

(ECGC) cover at 95 per cent to

badly hit eport sectors etended

till March 2010.


15/72


l A l l o c a t i o n f o r m a r k e t

development assistance scheme

enhanced to Rs 124 crore.

l Interest subvention on pre-

shipment credit for seven

employment-oriented eportsectors etended from September

30, 2009 to March 31, 2010.

l Sunset clause for deduction of

export prots under sections

10A and 10B of the Income

Ta Act etended by one more

year till the financial year

2010-11.

l Epansion in the list of duty

eempt raw materials/inputs

imported by manufacturer-

eporters of sports goods,

leather goods, tetile products

and footwear items.

l Two taable services - Transport

of goods through road and

Commission paid to foreign

agents to be eempted from

service ta, if the eporter is

liable to pay service ta on

reverse charge basis. Thus

there would be no need for the

exporters to rst pay the tax and

later claim refund in respect of

these services.

l Eport Promotion Councils

and the Federation of Indian

Eport Organizations (FIEO)

to be eempt from service ta

on the membership and other

fees collected by them till 31st

March 2010.

The f i rs t three measures

are continuation of incentives

announced earlier in 2008-09 as

part of stimulus measures aiming

to consolidate eport prospects.

All the measures are targeted at

improving the credit positions

of eporters. The outbreak of

the global downturn, apart from

depressing demand, has had

two other impacts. The rst of

these is a delayed realization of

payments for eporters. Indeed,

on a number of occasions,

there have been instances of

cancellation of overseas orders.

Such developments have created

considerable nancial difculties

for eporters, particularly the

small and medium ones, who have

obtained credit from financial

institutions for eecuting eport

orders. The second problem has

been a sudden drying up of tradenance due to liquidity crunches

faced by financial institutions

reducing credit availability for

eporters. Both these developments

have adversely affected credit

positions of eporters.

The interest subvention of 2

per cent was allowed earlier foremployment-intensive eport-

oriented sectors for the period

December 1, 2008 to September

30, 2009. The sectors covered

under the facility were tetiles

(including handloom), handicrafts,

carpets, leather, gems & jewellery,

marine products and small and

medium enterprises. All of these

are foreign echange earners

and labour-intensive segments

in terms of their production

organizations. Worsening of

prospects for these industries, apart

from reducing eport earnings,

also has implications in terms of

repercussions on employment.

The interest subvention can help

in addressing the credit difculties

faced by eporters from these

segments. Cost-cutting efforts

on part of producers are likely to

have resulted in retrenchments in

these segments. Credit squeeze islikely to intensify such tendencies.

Reducing obligations on pre-

shipment credit availed by the

exporters can lessen their nancial

difficulties and concomitant

enterprise contractions by some

extent. Similar benecial effects

are epected to be obtained from

etension of the ECGC cover andmarket development assistance

support. However, it must be noted

that as mentioned earlier these

are measures that will lessen the

burden of adjustment for eporters

on a purely short-term basis. It

would be foolish to epect these

measures to produce long-term

dividends.

Sof tware and e lec t ron ic

hardware eporters should be

encouraged by the announcement

of etension of the sunset clause

till the year 2010-11. These are

again sectors suffering from

depressed epor t ou t looks .

They also create considerable


16/72


employment opportunities. To that

etent, continuation of eemptions

under sections 10A and 10B

of the Income Ta Act of 1961

will help in retention of greater

prot margins for reinvestment.

It might also encourage them

to continue in their eisting

locations of technology parks,

rather than moving to special

economic zones (SEZs). On

the other hand, allowing sports

goods, leather goods, tetiles and

footwear manufacturers to import

more duty-free raw materials

and inputs for utilization in nal

product eports will help these

industries to achieve greater

efciency at a time when they are

already affected by credit squeeze

and poor outlooks. The service

ta eemptions should also be

welcome moves for the eporting

community. The latter, however,may not be particularly happy

with the imposition of service ta

on coastal cargo movements.

Lookin Ahead

The Budget has tried to help

eporters and eport-oriented

sectors in probably the only way

in which it could have: ensuring

that the credit crunch does not

get worse. Improving access of

eporters to credit requires now

calls for commensurate measures

from the Reserve Bank of India

(RBI) in terms of reducing

interest rates on pre-shipment

and post-shipment credit. These,

however, are different issues

altogether and beyond the scope

of the Budget.

Could the Budget have done

things in a different manner? Froman eternal sector perspective and

from the narrow prism of addressing

concerns of manufacturer eporters,

it has probably done as much as it

could have. It is important to see the

steps as consistent continuation of

the stimulus measures taken earlier.

To that etent, the budget has lived

up to the current establishments

commitment of helping the affected

sectors.

F rom a more a mbi t i ous

perspective, the Budget has tried

addressing some issues that can

have important bearing upon

eport prospects from a medium-

term outlook. A critical factor

determining the outlook for Indias

eports is the need to diversify

and achieve value addition in the

product basket. Indeed, India needs

to think beyond its traditional set

of eport items and make the

relatively modern value-additive

segments more competit ive.

Agricultural eports of both

fresh and processed products

can play a critical role in this

regard. Incentivizing investments

in agricultural warehousing andstorage can augment agricultural

infrastructure and improve the

prospects of agricultural eports.

On most occasions, people do not

realize that achieving efciency

in eports has a lot to do with

reducing costs in the domestic

economy. More steps such as those

taken by the Budget with respectto incentivization of investment

in development of agricultural

infrastructure can be useful in

enhancing Indias eport prospects

in the long term. q

(E-mail : [email protected])

Exporters get a shot in the arm

In order to push the country's sagging eports, which are down by over 30 % in February-May 2009

as against the same period last year due to economic recession, The FM provided some relief to

eporters. He etended the time period for 2 % interest subsidy and insurance cover up to March

2010. He also raised the market development assistance allocation.

The interest subvention on pre-shipment credit for seven sectors, including handlooms, handicraft,

carpets, leather, gems and jewellery, marine products as also the small and medium eporters will now

be available till March 31, 2010.


17/72


A Cautious and Restrained Budget

BudgET 09-10

T WILL not be fair to

compare the UPA led

governments 2nd budget

under the veteran politician

and administrator Pranab

Mukherjee with the one presented

by P Chidambaram during the

governments first term. When

Chidambaram presented his budget

for 2008-09 in keeping with thephilosophy that people must go

out and spend, global factors

and domestic environment were

just about right for investment

and spending. His entire taation

eercise was structured on this

principle. He rmly believed that

consumerism will fuel growth

and this country needs to be in

the comity of nations enjoyingeconomic strength and political

clout in global politics.

Switch to the 2009-10 budget

presented by Pranab Mukherjee.

The former eternal affairs minister

has not sacrificed any of these

sentiments. However, he had

I

The author is e Economics Editor, PTI News agency, contributor to Hindu Business Line and Industrial Economist and

corporate consultant on communication strategies.

This Budget isaccented towards

the rural poor, givesmarginal relief

for urbanites, andleaves industry

and stock marketdissatised. No majorprogrammes to rescue

the economy fromrecession, but there ispromise of return to

9% GDP growth

T N Ashok

a lot of handicaps to start with.

Fiscal deficit had burgeoned to

6.8%, revenue ependiture had

bloated, recession had had its

effects on industry, trade, commerce

and eports and there were poll

promises to be kept in line with the

election manifesto, a thanks giving

gesture to be gone through. Pranab

da has put in a lot of thought intohis budget eercise. He has done

the best under the circumstances.

Cautious optimism has been the

hallmark of his budget. Although

people had epected a bo lder

budget with more emphasis on

reforms, and although the absence

of any major statement on FDI and

disinvestment has disappointed

industry and the stock market, hehas made it clear the budget is

continuing eercise it is not a

one stop affairs, announcements

can be made outside of the budget

also, that he will do so when the

economic environment improves.

So there is hope for the industry

and stock markets.

OpiNiON


18/72


The nance minister has made

massive allocations under the

NREGA programme Rs 39,100

crore to cover 4.74 crore house

holds. A Food Security Bill is in

the ofng. Massive relief has been

announced to farmers with 75% of

their overdues under debt waiverand debt relief scheme etended

to December 31 this year. There is

a committee to eamine the plight

of Maharashtra farmers suffering

under the usurious money lenders.

25 kgs wheat and rice is to be

provided for below poverty line

population at Rs 3 per kg. These

are measures clearly aimed at the

rural folk who have voted wellfor the UPA government, a thanks

giving indeed.

What about the urban population?

He has etended relief by making

marginal adjustments in the taation

slabs. He has raised the eemption

limit for majority of ta payers

at the entry level. Here is how it

works. Senior citizens benefit a

great deal as the eemption limit

gets pushed up further by another

Rs 15,000. From the eisting limit

of Rs 2.25 lakhs now it goes upto

Rs 2.40 lakhs. For women, there

is relief as the limit goes up from

Rs 1.80 lakhs to Rs 1.90 lakhs and

for the vast majority of ta payers

it goes up from Rs 1.50 lakhs to Rs

1.60 lakhs.

At a time of joblessness 60

lakh people have lost their jobs

in India due to the recession and

another 60 lakh might as well

these reliefs count a lot as they put

more money into the hands of the

people. Some ta consultants have

argued that the ta relief amount to

just about Rs 1,000 for a majority

of the people below the 10 lakh

income bracket and above the 10

lakh bracket it is a minimum of

Rs 22,415. This may have been

cause for the statement by some

that its a budget for Khas Admi and

not Aam Admi, but this is true on

the surface only. If you go deeper,

the majority relief for the above 10

lakh bracket actually come from the

abolition of the 10% surcharge on

direct taes and not the adjustment

in the taation slabs.

The nance minister has indeed

done a tight rope walking trying to

satisfy the rural population who

voted enmasse, urban population

who reposed trust, and industrywhich was supporting, eagerly

awaiting sops.

The Finance Minister has done

well to scrap the Fringe Benet Tax

(FBT). It was long overdue. FBT was

more of an irritant than an income

generator for the government. It

put the nance people of corporates

at considerable stress on how to

calculate the taes. A welcomerelief. But the Finance Minister

did not scrap the 10% surcharge on

corporate ta payers though he did

that for individuals.

Scrapping of the Commodity

Transaction Ta is another great

relief. It will promote trade on

the Multi Commodity Echanges

(MCx) where gold, silver and

other metals are traded generally.

It will also promote trade on the

NCDEx where mostly agricultural

commodities are traded in the

futures market.

The FM did not scrap the

Securities Transaction Ta prevalent

on the stock markets. Justiably so,

though many stock market leaders

, brokers and players would be

disappointed. Considering the

volume of trade is so high on the

stock echange, the government

can ill afford to lose this revenue.

Generally with so many foreign

players coming into the Indian

markets especially in the contet

of the global meltdown, because

India like China has survived the

meltdown and global recession,

it would have been an ill advised

move. The FMs budget has to be

viewed in an overall contet of high

scal decit and low growth.

Markets are sluggish, banks

are holding onto money and not

lending, creating problems forindustry, so the industry epected

bold statements on divestment in

the banking sector and measures

to promote greater inow of FDI.

It also epected the abolition of the

Dividend Distribution Ta, which is

an anomaly leading to a company

being taed twice. Certainly the

FM should have scrapped this but

he must have had his own logic and

nancial compulsions not to scrap it

as he did with other irritants.

Why no bold measures on

FDI or FII portfolio investments,

one might ask? Consider the fact

that FII investments are highly

fragile and prone to ight when

an economy weakens. So rightly

he did not want to risk any new

measures in this regard given thecurrent world economic situation.

And how would FDI come into

India even if new incentives were

announced, when most global

corporates are pulling money out

of India ( BPO and Realty sector

are good eamples) to wipe out

their debts in their own countries?

Unless they are strong at home, they

will not bring any new money into


19/72


India. So FM has played safe and

will denitely do something outside

the budget later when the world

economic environment improves

and FDI ows can accelerate.

Industry is disappointed that the

Minimum Alternate Ta (MAT) hasbeen enhanced from 10-15%. It was

epecting some relief.

Here is the score card on the

budget of Pranab Mukherjee, the

positives and negatives together:

Direct Taes

Personal income tax exemption

limit rose favoring more women

and senior citizen ta payers whohave suffered from low interest

regime so far. Interest rates still

low hitting senior citizens living

on savings instruments.

10% surcharge on personal

ta removed. But the same not

removed for corporates

No change in the corporate tax

structure rates

FBT abolished more of an

irritant gone

Minimum Alternative Tax hike

to 15% from 10% -- a rude

shock to the industry

Indirect Taes

Excise duty increased from 4-8%

barring eceptions industry

clamors for duty reductions tomake itself more competitive,

any increase at the time of

recession does not go well.

Eporters would be the worst

hit.

Customs duty on gold bars and

other forms increased, people

hedging on ination by buying

this suffer as importers will pass

on the burden. Also jewellery

made from imported gold

will become dearer hitting the

women in this category badly.

But there is relief in abolition

of duties on branded jewellery.

Excise on branded diesel and

petrol modied. Impact has tobe assessed. But government

has appointed a high level

committee, a second time , to

advice on pricing. It wants to

align with international prices

but the full benefit of this

can be realized only when

government releases the oil

companies from the burden of

subsidies. The most subsidized

products are Kerosene and LPG.One caters to the poorer sections

and another to the middle class

housewife a path where any

government fears to tread.

There is a welcome measure in

making fertilizer subsidy nutrient

based and not price based. Also

farmers will now get the benet

directly from the government

instead of the companies.

Donations to political trusts

eempted from taes. A forward

looking measure but the manner in

which these funds would be used by

the trusts has still to be scrutinized

by the government.

A big question on the budget

that is crying for answer is how the

FM mobilizes resources to pay offfor the large allocations made under

different rural uplift schemes and

in the light of concessions given to

ta payers. The ta concessions are

all revenue neutral, there is no loss.

But the new taation measures yield

only Rs 3000 crore. Not enough.

So the FM is perhaps pegging

his hopes on the 3G spectrum

licensing process which is epected

to yield a whopping Rs 35,000

crore, disinvestment in the PSUs

NHPC and Oil India and growth to

return to 9% which will obviously

mean more production of goods

and services and therefore higher

buoyancy in ta collections.

The budget has had its share of

criticisms from several quarters.

Some have called it tepid and

unimpressive, others have criticized

it of being pro-rich and yet others

have termed it as visionless.

There have been calls for more

disinvestment and raising income

ta eemption limits to Rs 5 lakhs.

These reactions are not justified,

though. Firstly, the entire budget is

rural oriented and aimed at the rural

poor. In urban areas too its aimed to

benet the middle class. Secondly,

Its unfair to epect an FM to come

out with any bold statements at

the time of recession when stock

taking is still on. For eample,

retaining banks in the public sector

has been very sensible, given the

west's eperience with privatebanks. Raising eemption limits to

Rs 5 lakhs sounds good on paper,

but is not practical as the number

of ta payers in this category are

quite large. This is a utopian dream

capable of fruition only when India

can achieve a 10-12% growth rate.

Overall, its a budget based on

restraint and caution, addressing

immediate needs ,besides giving

thanks to rural and urban voters.

A job done judiciously under the

circumstances of recession. Now we

need to wait and watch if the FM

delivers on the promise of Direct

Taes Code, and the public debate

on Food Security Bill, and other

such progressive measures. q

(E-mail : [email protected])


20/72


YE-8/09/6


21/72


Financing Health and Education

BudgET 09-10

UDGET 2009-10 might

be perceived as having

fallen short of delivering

all that might have been

wished for in the health

and education sectors, but there

are distinct signs that the intent

is there that the Current Year

budget is the UPA II governments

first step in that direction. Thethrust had already been articulated

by President Pratibha Patil in her

June 4 Lok Sabha address. She

had then placed special stress on

education, health and infrastructure

as focus areas of the re-elected UPA

government.

HEALTH

The revised ependiture targetfor Health & Family Welfare has

been set at Rs 21,113.33 crore,

or, Rs 3,706.33 crore above last

years revised (2008-09) gure of

Rs 17,307 crore. To that should be

added the amount that Mr Pranab

Mukherjee has earmarked for

Women & Child Development; at

B

The author is Fellow, Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata.

There should

be no further

neglect of the

ways and meansof hiking domestic

productivity

and demand

in health as

well as education

Soumyakanti Mitra

Rs 7,428.00 crore, it is Rs 509.00

crore above last years revised

gure. Taken together, they might

both be slotted under Health,

in which case they add up to

Rs 28,541.33 crore, which is almost

18 percent above last years gure.

(It is instructive that last years

budgeted gures were surpassed

by the denitive revised numbers aspublished in the budget document

of July 6.)

Within health, Finance Minister

Pranab Mukherjee has accorded

special emphasis to rural healthcare

and hiked the allocation under this

head by Rs 2,057 crore. But that is

over, and above, the Rs 12,070 crore

that had already been allocated in

the Interim Budget. Indeed, Mr

Pranab Mukherjee characterized

the National Rural Health Mission

NRHM as an essential instrument

for achieving the goal of "health for

all in his budget speech.

The budge t charges the

NRHM with taking high quality

ViEw pOiNT


22/72


healthcare to the villages. These

are reiterations of the fact that

the NRHM (launched in 2005)

remains at the ape of the UPA

governments many programmes.

It aims to continually upgrade the

availability, and access, of good but

affordable healthcare for peopleliving in distant areas.

The NRHMs salience resides

in the fact that only 4.9 percent of

the (10 percent targeted) population

has been covered for malaria

prevention. Thousands of Kala-

azar cases have also been surfacing,

as have been cases of goitre and

leprosy. For NRHM, accordingly,

disease prevention is as important

as control

The NRHM actually admits

of 18 critical states each one

of which is backward in terms of

public health infrastructure. They

are Arunachal Pradesh, Assam,

Bihar, Chhattisgarh, Himachal

Pradesh, Jharkhand, Jammu &

Kashmir, Manipur, Mizoram,Meghalaya, Madhya Pradesh,

Nagaland, Orissa, Ra jasthan,

Sikkim, Tripura, Uttarakhand and

Uttar Pradesh. New Delhi even

wants to redress imbalances in

regional health-care service delivery

by building si, additional, AIIMS-

type institutions in Patna (Bihar),

Raipur (Chhattisgarh), Bhopal

(Madhya Pradesh), Bhubaneswar

(Orissa), Jodhpur (Rajasthan) and

Rishikesh (Uttarakhand). They will

most likely be functioning by 2010-

11 and Rs 1,447.92 crore has been

earmarked for them.

The UPA IIs July 6 Budget also

epressed the intention of upgrading

13 medical colleges something

likely to be completed within the

current scal. In addition to that, the

Union Budget has set aside Rs 10

crore for the National Programme

for Prevention and Control of

Deafness (NPPCD) the advance

phase of which will be launched

across 25 districts over the net two

years. The NPPCDs objective is to

forestall avoidable hearing lossthrough advance identication and

therapy. And, Rs 100 has been the

sum allotted to institutionalise fresh

medical, non-medical and nursing

courses under professional health

ministry bodies the aim, in this

case, being to accommodate 27

percent reservation for the Other

Backward Classes (OBC).

Thanks to the budget, even the

indigenous roots of medical wisdom

are being watered. Rs 922.00 crore

is the sum of Plan and non-Plan

amounts that the nance bill has

sequestered for the health ministrys

department of Ayurveda, Yoga and

Naturopathy, Unani, Siddha and

Homoeopathy (AYUSH). That is

a 53 percent rise over last scals

revised figure of Rs 602 crore.Plus, the 46 lakh-plus Indians who

are below the poverty line (BPL)

have found a fresh dawn in the

shape of biometric smart cards.

Spread across 18 states and Union

Territories, they have been issued

the cards and, as the nance minister

said, the scheme empowers poor

families by giving them freedom of

choice for using healthcare servicesfrom an etensive list of hospitals

including private hospitals. Mr

Mukherjee went on to also say

that the Government proposes

to bring all BPL families under

this scheme. An amount of Rs 350

crore, marking 40 percent increase

over the previous allocation, is

being provided in 2009-10 budget

estimates."

Then, on the supply side of

private enterprise, Union Budget

2009-10 has been largely a relief

for the pharma industry. For one,

the sectors players are especially

glad that the ecise duty remains

constant at 4 percent. That should

please consumers too. Secondly,industry is happy because of the

weighted 150 percent deduction

that will apply to R&D ependiture

incurred in in-house manufacturing.

The main gains will be accruing

to medical education and research

since the budget sets aside Rs 1,000

crore etra for medical research

institutes. Thirdly, the customs duty

on life saving drugs stands halvedand is 5 percent now; they include

the influenza vaccine, and nine

life saving drugs recommended

for diseases like breast cancer,

hepatitis-B and rheumatic arthritis.

The duty reduction also applies to

bulk drugs which are inputs in the

manufacture of such drugs. Drugs

of this category have been rendered

free of ecise and countervailingduties.

In sum, it could be said that the

UPAs new philosophy of Outreach

characterizes the budgets planned

subventions on the health front.

There seems to be a distinct urge on

governments part to universalize

good health and take preventive

care even to the least advantaged.

That it has allocated virtually doubleto the AYUSH group of therapy of

what the sector got in last years

budget also shows its newfound

realization about indigenous

medicine. Such subventions

should promote the immigration

of additional professional talent

into these streams complementing

the contemporary developments

that are in progress.


23/72


This might even be said to be

preventive therapy of the truest

nature; it does not spring from any

interest in commercializing either

placebos, procedures or fancy

formulations but unravels illnesses

by identifying their basic causes.

That is of a piece with the fact thatall those undergoing cosmetic and

plastic surgery will have to pay

service ta.

EDuCATION

Education is as crucial as

health for emerging India. It raises

productivity, enables new lines

of production, and lowers costs

all round. Economists would sayit is instrumental in pushing the

production possibil ity frontier

outwards (i.e., raising it) in any

given economy. And, it does so

with little, or no, etra investment

outside, apart from in human

resources.

Plainly, the UPA understands

the pivotal role of education and

the nance minister has allottedRs 29,099.21 crore to School

Education & Literacy in the

budget, while Higher Education

gets Rs 15,429 crore. That adds

up to a 19.2 percent increase

over last years numbers. To that

might also be added outlays under

three other heads Science &

Technology, Scientic & Industrial

Research and Biotechnology. IITsand NITs, for instance, have been

allocated Rs 2,113 crore out of

which the provision for new IITs

and NITs amounts to Rs 450 crore

(or, 21 percent). The minister also

proposed Rs 495 crore to set up

and upgrade polytechnics under the

Skill Development Mission, while

Rs 20 crore has been reserved for

new IIMs.

Mr Pranab Mukherjee also

announced prematriculation and

post-matriculation scholarships

for minorities plus Rs 25 crore

to facilitate the creation of two

etra Aligarh Muslim University

(AMU) campuses at Murshidabad

in West Bengal and Malappuram inKerala. Also, a special allocation of

Rs 50 crore was made for Panjab

University, Chandigarh.

In sum, there is a pronounced

thrust on higher education and

allocations to that segment are Rs

2,000 crore more than had been

earmarked by the Interim Budget.

The grand total of Rs 50,376.21

crore, represents an 18.5 percent

increase over last years (revised)

amount of Rs 42,509.57 crore.

Also, the gures of July 6 are well

above the Rs 34,000 crore that

had been assured the sector in last

Februarys Interim Budget.

Accordingly, there is more

for schooling and literacy, but

the growth rate of funding thoseactivities pales into insignicance

when compared to subventions

in higher education. Accordingly,

schooling and literacy got 11.2

percent more than they had been

allotted in 2008-09, but this years

handout to higher education is 36.1

percent over last years!

The only saving grace is that

school education has been awardeda new Rs 1,000 crore-plus scheme

the Rashtriya Madhyamik

Shiksha Abhiyan. Also, the new

nomenclature for the (already

eisting) literacy mission is the

National Female Literacy Mission.

The latters objective to reduce by

half the current level of female

illiteracy and to do so in three

years.

The programme is all about

setting up new schools in population

clusters bereft of school facilities

or infrastructure. Also, it aims to

provide additional classrooms,

toilets, drinking water and

disburse maintenance, and school

improvement, grants. There willbe special focus on educating girls,

plus children with special needs.

And it includes the provision of

computer education to merge the

digital divide.

Even eisting schools stand to

benet: The Abhiyan empowers

them to a t t ract , and re ta in ,

additional teachers and eisting

teachers get further training.

There will also be grants for

developing pedagogic material,

and strengthen the structure of

academic support at cluster, block

and district levels.

Indeed the Rashtriya Madhyamik

Shiksha Abhiyan is the governments

ape programme for attaining the

Universalization of ElementaryEducation (UEE) in a time bound

manner. That is as mandated by the

86th Amendment to the Constitution

of India, which makes education for

children between the ages of 6 and

14 compulsory and free. Also, the

scheme being implemented in

partnership with State Governments

aims at covering all of India

and responding to the needs of

19.2 crore children in 11 lakh

habitations.

The above, in fact, denotes

the UPAs significant mindset

change in relation to elementary

education. For, while there may be

no striking increase in allocations

for elementary education, Rs

1,143 crore has been set aside

for a new scheme which is to


24/72


function along the lines of the Sarva

Shiksha Abhiyaan and provide

for a secondary school within 5

km of every residential area. That

should catalyse the building and

commissioning of the 6,000 model

schools within the current scal

year; after all, they were announcedin 2007.

Finally, poor students are to be

helped in pursuing costly technical

courses through a government

scheme that awards them full

interest subsidy during the

period of moratorium one year

from completion of the course or

si months from joining a job,

whichever is earlier.

Clearly, the governments

initiatives, both in health as well

as education, denote distinct thruststowards outreach and inclusion

and uplift of the hitherto neglected.

But, equally clearly, the backlog is

too big to be quickly cleared and

the government needs to plough

in much more funds before it can

claim to make a dent.

Above all, the current recession

and its fallout in terms of the global

e

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