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Union Budget 2009-2010: The Uncertainty Continues
August, 13th 2009

By Prof. Sudhakar Panda, Bhubaneswar : On 6th July,2009 just 140 days after the presentation of the Interim Budget, Sri Pranab Mukherjee, the Finance Minister presented the budget for the financial year 2009-10.This budget is crucial and assumes significance as the economy has come under the impact of global recession. The slow down of the global economy had its impact on Indias foreign trade, finance and investment, aviation, hospitality, real estate, engineering, garment manufacturing, jewellery and handicraft sectors.

Recession in the global market affected our industries, jobs and income. Our GDP declined.  Indian economy,in fact, suffered a decline in its growth rate from an average of over 9% in the previous three fiscal years to 6.7% in2008-09.There prevailed a fear that internal consumption in India might drop further leading to a decline in income and employment.

The nation, in fact, was waiting almost breathlessly for a big stimulus package for the quick recovery of the economy. For announcement of sops in the budget for industry, trade, agriculture, services sector and  for the social sector.
 
Higher and faster spending by the state was expected not only to provide an opportunity for the recovery of the economy but also to improve the prospects of growth. It became imperative that all efforts must be made not only to shield the economy from the effects of the global meltdown but also provide it with financial, functional and legal support for growth at all levels.
 
At the sect oral level tax payers including senior citizens and working women looked forward to tax reliefs. The corporate sector, because of the impact of global recession expected tax cuts and investment benefits. Farmers expected debt relief. Poor households looked forward to government action to bail them out of poverty and unemployment. They also looked forward to food security.  They have to be given 25kgs.of rice wheat a month at the subsidized price of Rs.3 a kg.

To check recession successfully and reengineer growth at a higher level, the government have to spend heavily, put more and more money into the market, increase opportunities of employment for the youth and provide the promised benefits to the voters to achieve inclusive growth. Though the primary objective was to raise the growth rate of the national economy, the aam admi was not forgotten.
         
The budget which adopts a medium term perspective identified the following broad objectives;
1.  to achieve GDP growth rate of 9per cent per annum,
2.  to strengthen the mechanism of inclusive growth by creating almost 12million of new work opportunities per year
3.  to reduce the proportion of people living below poverty line in 2009 to less than half by 2014,
4.  to achieve an annual rate of growth of 4%in agriculture,
5.  to increase investment in infrastructure to more than 9%of GDP by 2014,
6.  to provide support to the  Indian industry to meet the challenge of global competition and sustain growth in  exports,
7.  to strengthen the regulatory framework,
8.  to expand the social safety network, particularly for the vulnerable sections of the society,
9.  to strengthen the delivery mechanism for primary health care facilities,
10. to create an education system of global standards, and
11. to pursue an Integrated Energy Policy to provide energy security.
 
The budget recognises the immediate requirement of a stimulus package for the Indian economy. The Finance Minister has accordingly adopted a comprehensive approach to spending and given a detailed analysis of proposed expenditure by the government in the current year. As the Finance Minister, his immediate job is to prevent recession and create an enabling environment for investment and business opportunities at all levels to create millions of jobs for Indias young people who are restless and look forward to equitable development.

Under these circumstances public spending will go up and the state has no choice but to take necessary measures to keep money flowing into the economy to finance investments, job creation and enlarge the delivery mechanism to run public services and fulfill the promises made to the aam admi.

It is therefore not surprising that budget 2009-10 provides for a total expenditure of Rs.10,20,838 crore of which Rs.6,95,689crore is for Non-plan expenditure and Rs.3,25,149 for Plan expenditure. Non-plan expenditure takes care of the hike in pay after the implementation of recommendations of the Sixth Central Pay Commission, higher food subsidy and higher interest payments constituting 36%of the Non-plan revenue expenditure.

Subsidies have also gone up from Rs.71, 431crore in B.E.2008-09 to Rs.1, 11,276crore in B.E.2009-10. As against the budget estimate of Rs.10,20,838 crore, gross tax receipts and non-tax revenue receipts to be mobilized in 2009-10 has been estimated at Rs.6,41,079 crore and Rs.1,40,279 crore respectively.Net tax revenue available to the centre after transfer of States share(Rs.1,64,361} crore and transfer to the National Calamity Contingency Fund(Rs.2,500 crore) stands at Rs.4,74,218 crore .Total Revenue Receipts(Rs.4,74,218 crore+Rs.1,40,279 crore) available to union government will brRs.6,14,497 crore.

When Capital Receipts[ the Non-debt receipts, that is Rs.5,345 crore] are added to it, the total receipts for the year 2009-10 comes toRsRs.6,19,842 crore. Total Debt Receipts to be raised for financing the projected expenditure has been estimated at Rs.4,00,996 crore. Market loans will be the largest component estimated at Rs.3,96,957 crore.

Budget 2009-10 has many ambitious proposals for the economy and particularly for rural India, that is, Bharat. It has focused on NREGA with a minimum wage of Rs.100 per day, BPL families, Rural Housing, Rural Electrification, development of Backward Villages,   Empowerment 0f Weaker Sections, Bharat Nirman, Pradhan Mantri Adarsh Gram Yojana [PMAGY], IAY, and the development of villages with over 50% SCs/STs population. How do we finance these development projects and achieve the three challenges it sets out for itself in terms of high GDP growth, inclusive growth and a strong, efficient and reliable delivery system. To foster growth and achieve these objectives the country needs to mobilize funds for investment.

Yet it can not afford to undermine the investment climate by raising either the personal income tax rate or the corporate tax rate. The state, on the other hand, may be called upon to adopt a generous view towards taxes to improve business environment.

To begin with, tax payers in India have reasons to feel cheerful for the tax cuts which have been announced as a part of the stimulus package by raising the personal income tax limit for the senior citizens, women tax payers and other categories of individual tax payers by Rs.15,000 and Rs.10,000 respectively. Tax exemption limit for the medical treatment of dependants has also been raised. The surcharge on personal income tax has been waived. Fringe Benefit Tax has been dispensed with. Left with a higher disposable income, people are expected to spend more in the market, raise the size of aggregate demand and provide incentives to the producers.

Corporate tax rate has not been changed. This disappointed the corporate sector. But commodities transaction tax has been abolished Tax incentive provided to the corporate sector for expenditure incurred on R&D has been extended. The NPS [New Pension System] Trust has been exempted from income tax. And it is interesting to note that donations to electoral trusts have been totally exempted from income tax. This move by the Finance Minister will please all political parties and provide relief to the donors.

Charitable institutions receiving anonymous donation and trusts engaged in preserving and improving our environment.------and preserving our monuments or places or objects of artistic or historic interest have been given tax relief. Tax holiday benefit has now been extended to the energy sector to encourage the entrepreneurs for commercial production of a wider range of energy services [production of natural gas].

It may be noted that against all this tax benefits, the Minimum Alternate Tax [MAT] rate has been raised from the present rate of 10% to 15% of book profits.

Not only consumption spending but also production of goods and services has been given the stimulus by creating a soft tax regime by proposing a number of tax reform measures. Basic customs duty on LCD panels will be reduced from 10% to 5% to support indigenous production of LCD televisions. Full exemption of CVD of 4% now available on imported accessories for manufacturing mobile phones has been extended for one more year.

Tax concession available to leather products, textile garments, footwear and sports goods etc. will continue. But 8% excise duty on manmade fibers has been restored. Import of corals for value addition and export will enjoy full exemption from basic customs duty. Basic customs duty on permanent magnets has been reduced from7.5% to 5%. Customs duty on life saving drugs has been reduced from 10% to 5%.

They will also be totally exempted from excise duty and countervailing duty. Import of gold and gold jewellery, silver and silver jewellery will be now costlier as custom duties on them have been raised though branded jewellery has been exempted fully from excise duty While central excise duties have been made less burdensome for wool waste and cotton waste, bio-diesel, car and utility vehicles, petrol driven trucks, the IT industry[transfer of the right to use packaged software] and the construction industry [pre-fabricated concrete slabs or blocks] will now enjoy full exemption from excise duty.

It may also be noted that an initiative has been taken in the budget to facilitate a convergence of central excise duty rates to a mean rate with necessary exceptions that include food items, drugs, pharmaceuticals and medical equipment. All steps are being taken for the implementation of the General Service Tax both at the national and state levels from the next fiscal year.
It may also be noted that not only exemptions but also a lot of simplifications have been introduced in the service tax sector to make it business friendly.

Two things stand out prominently in the budget. The slowdown in the growth of the Indian economy in 2008-09 has not led to any  cuts in the provision of funds, particularly for the social sector and more so when you think of food security, education, health care, employment and housing  programmes for the poor, that is, for the aam admi.

It is a big stimulus budget intended to create a big bang to raise the level of spending to put the national economy on a high growth path.  The Finance Minister has tried to achieve it without raising direct taxes. On the contrary tax relief has been proposed. In case of indirect taxes, the tax hike has been limited.

A visible recession gives us reasons to feel unhappy. But more money in the pocket makes us happy. That is what the Finance Minister has tried to do to increase total spending in the economy to fight the effects of recession on the economy.

To raise resources under the prevailing economic conditions, he has no other option but to resort to deficit financing and market borrowing. Fiscal deficit and revenue deficit have accordingly been projected to rise to 6.8% and 4.8% of GDP respectively in the budget estimate of 2009-10..Debt financing of the programmes included in the budget may have a stimulating impact on the economy if used for infrastructure and human capital formation not for financing subsidies and wasteful expenditure. The economy may not generate enough surplus for repayment of loans with interest in subsequent years. The state may have to resort to additional borrowings again and again just to service the earlier debts.

It may also be noted that the state governments have been authorized to raise additional borrowings from 3.5% to 4% of their GSDP by relaxing the fiscal deficit target by 0.5%  under the FRBMAct. This would result in states borrowing of Rs.21,000 crore additionally over interim budget estimate 2009-10.Thus market borrowings may rise to  more than Rs.4 lakh crore.  A legitimate fear is that in the process the country may get into huge borrowings and may walk into an internal debt trap.

The state may, as a part of the reforms programmes, go for disinvestment of assets in the public sector enterprises to raise revenue to fund the programmes. In that case, the UPA government may face political resistance .Given the sheer size of spending in the current year, one can not rule out the possibility of inflation in the economy. A policy of fiscal enlargement coupled with a loose monetary policy intended to fight the downturn and cause an upturn in the economy may result in injecting too much of liquidity into the system. It may affect price stability. Inflation then may cause alarm if the supply of goods and services is not sufficiently augmented

A lot will depend on the spending of the new and additional income generated in the economy, particularly on the spending of consumers in the elite class and high income groups. Equally important is the size of spending and business investment. Both of them should be strong enough to reinforce the efforts of the government. The recovery may become slow if consumption spending by the households does not pick up/business investment remains weak.

 
 
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