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FM defends Budget, says recovery on
July, 15th 2009

Union finance minister Pranab Mukherjee on Tuesday strongly defended the governments Budget proposals, even as he maintained that the economy was showing signs of a recovery and allayed fears that the government was averse to pursuing second generation economic reforms such as disinvestment and fiscal correction.

Renewing the governments commitment to its strategy of inclusive growth, Mukherjee said: The focus of our policies is aam aadmi (the common man). But we are equally aware of the fact that wealth has to be created before it can be distributed.

In his reply to the discussion on the Union Budget 2009-10 in the Lok Sabha, Mukherjee reached out to rival parties for support to ensure the implementation of the goods and services tax (GST) on schedule by 1 April.

The minister claimed that the move to GST would boost tax collections, making it easier for the government to return to the path of fiscal rectitude.

The government, he said, had deliberately decided to suspend its fiscal consolidation plan, since the immediate priority was to protect the economys growth rate. The softer option to maintain fiscal prudence was not taken...our strategy was to meet the development requirement more in rural areas by stimulating demand.

The minister maintained that the extra stimulus had not entirely derailed the governments spending plans. Instead, he argued, it was still within the bounds laid down in the 11th Five-year Plan (2007-12). The fiscal stimulus has been in the nature of front loading of the Plan expenditure approved for the 11th Five-year Plan. With some effort, we should be able to align it with our future requirements.

R.S. Srivastava, a professor at New Delhis Jawaharlal Nehru University, said that there has to be a trade-off between high fiscal deficit and increased spending in the rural sector given the recessionary situation the country faces today. Other countries such as the US and China, he added, also face the problem of high fiscal deficits.

Taking into account the three stimulus packages and the incentives in the union budget, the total value of the stimulus amounted to Rs2.18 trillion; the bulk of this, Mukherjee explained, would be towards investments in infrastructure, both urban and rural, as well as populist social development programmes.

Conceding that bulk of this spending would be financed through enhanced borrowings, the minister said, The government, has taken a tremendous risk with the hope that there will be a recovery.

Srivastava, however, said it remained to be seen whether the spending on aam aadmi will actually...propel rural demand and, in turn, propel demand for consumer goods. If the money is siphoned off, the very purpose will be defeated, he added, referring to an oft voiced complaint against the way Indias populist development programmes are implemented.
S.L. Rao, former head of the National Council of Applied Economic Research, a think tank, said that while the government has made significant investments in development programmes, largely targeted at rural India, he remained troubled by the effectiveness of this spending, because it is well known that leakages in these programmes are high and money is going into the wrong pockets.

Mukherjee claimed that there are already indications that the governments gamble is paying off. Not only is the global economy bottoming out, several sectors in the Indian economy are beginning to look up, he said. The minister listed as evidence to support this argument, the annual growth in June of steel production by 13%, of cement production by 13.1% and automobile sales by 14.3%.

Pointing out that annual consumer goods production rose by 12.4% in May, while new mobile connections jumped by 49% in the same month, Mukherjee said, This reflects greater purchasing power with the middle income groups, easier availability of credit and affordability.

The minister also sought to reassure the House that the government was closely monitoring the progress of the monsoon, which has thus far been below normal. In recent weeks, there have been some concerns on the progress of monsoon. The government is monitoring the situation on a daily basis and is ready to implement its contingency plan, if required.

Addressing the criticism that the government is soft on its commitment to reforms, the minister told the Lok Sabha that the Congress-led United Progressive Alliance (UPA) government had made its intentions clear as early as the Presidents address to the joint session of Parliament when the 15th Lok Sabha was convened. According to Mukherjee, the finance ministry is in discussion with other ministries to work out a precise plan for disinvestment of government equity as well as issue of fresh equity to finance new projects of public sector undertakings. A plan will be announced in due course, he added.

The minister also denied that increased borrowings by the government to finance its big step-up in spending would squeeze out private sector investments.

Mukherjee reiterated the targets laid down in the medium-term fiscal policy statement placed in Parliament along with the Union Budget in which the UPA has committed to reducing the fiscal deficit, or gross government borrowings, to 5.5% in 2010-11 and 4% in 2011-12. This, he said, would be made possible because the one-time effect of implementing the Sixth Pay Commission would wind down in the current fiscal and through recovery of tax buoyancy by restoring of the growth momentum and implementation of GST on schedule.

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