Gird your loins to ride out the global economic storm, and don’t get diverted by pleas for unending tax cuts and stimulus packages that will empty the treasury without ending the storm. That should be the approach of finance minister Pranab Mukherjee in his coming budget.

He will surely ignore calls for radical reform, since UPA-2 is a status quo regime. It is no longer constrained by the Left Front, but its own approach can be called the Common Minimum Programme-2. Since the election victory has vindicated its policies, why not dole out more of the same?

This became clear in the President’s address to Parliament. This did not highlight a single major economic reform. But it highlighted continuing efforts to help the aam aadmi, stressing social, rural, anti-poverty, infrastructure and employment programmes, and promising a Food Security Act to guarantee 25 kg of grain at Rs 3 to all poor families.

Mukherjee needs to provide fully for all such programmes. And he must step up spending on infrastructure, especially rural infrastructure, which will combat the recession while strengthening the foundation for future growth. His focus must on such spending, not on tax cuts.

The flood of global money ($1 billion a week recently) into stock markets looks like the mother of all stimuli. Indian companies can suddenly tap global investors for billions in equity and debt. Hence Mukherjee can ignore calls for a fresh fiscal stimulus: the global economy has already done this job. The recession shows signs of easing, but the recovery will be weak and halting. Mukherjee’s strategy must be to ride out the storm with fortitude, and not think that a new fiscal stimulus package can somehow revive fast growth even as the world economy remains bogged down.

Three stimulus packages in the last eight months have made obsolete the notion that we have fiscal changes through a budget once a year. Instead, radical budgetary changes for eight months have eclipsed anything proposed in regular budgets. The stimulus packages have cut standard excise duty from 14% to 10% and then further to 8%. Service tax has been cut from 12% to 10%. Import and countervailing duties have been raised on steel and cement. Duty drawback rates have been increased for exporters. Besides, a host of monetary measures have reduced interest rates, increased liquidity, and directed credit to sectors in need.

After eight months of frenzied stimuli, we now need quiet consolidation. Mukherjee will be tempted to woo voters with cuts in income tax, but should resist the temptation. Indeed, he should announce a phased restoration of the indirect tax cuts over the next two years, starting six months hence. The end of the recession should mean the end of tax cuts too. By chalking out a road map now itself, he will remove the political sting from tax re-imposition at every future milestone.

He should revise the Fiscal Responsibility and Budget Management Act, adjusting for the global business cycle to which India is now inescapably linked. The deficit targets should be eased by up to three percentage points in a recession, and tightened by up to three percentage points if an upswing lasts more than five years. The revised revenue deficit targets should categorise maintenance on education and health as investment, not revenue spending. Central and state indirect taxes are to be replaced by a unified Goods and Services Tax by April 2010, but that deadline looks unrealistic.

Mukherjee should postpone actual implementation to April 2011, and set a time-table for various steps in training and procedures from now till then. He must guarantee states against revenue losses for five years after the switchover (this will probably cost very little). He should cut Central Sales Tax to 1% and abolish it outright by April 1, 2010.

Palaniappan Chidambaram used smoke and mirrors to pretend that he was adhering to FRBM targets. Since the government was unwilling to raise the prices of petroleum products or fertilisers in line with world prices, the oil marketing and fertiliser companies suffered huge losses. Instead of compensating them from the budget, Chidambaram offered them off-budget bonds. We must end this charade and have budgetary transparency. All bonds must be on budget, not hidden off-stage.

More important, the subsidy on these items must be overhauled. The government is entitled to subsidise what it feels is important. But this should take the form of a fixed sum of money per year, not a fixed price. If the price is fixed, the implicit subsidy automatically rises with world prices. This means that subsidising oil and fertilisers becomes the highest priority of the government, trumping all other uses of revenue. That is crazy. We must prepare for the harsh future in which oil will cross $200/barrel within five years. That means phased decontrol of prices, starting from this budget.

Congress analysts think the National Rural Employment Guarantee Act (NREGA) helped win them the election, and so want to extend employment guarantees to urban areas. The analogy is mistaken. Rural areas have labour shortage at sowing and harvest time, but slack employment in between. So supplementary employment schemes in the lean season make sense. Many rural assets can be built mainly with labour — land levelling, bunding, water harvesting, even rural homes. So, labour-intensive works in rural areas can produce durable assets.

But not in urban areas. First, city wages are frequently higher than the minimum wage, so urban projects can get stranded by fragmented or zero labour demand. Second, urban work is not seasonal, and it is neither desirable nor feasible for government programmes to provide round-the-year work. Finally, urban assets cannot be created through labour-intensive means — even a simple wall entails only 35-40% labour cost, the rest being material cost. So, for the urban poor, Mukherjee should focus on expanding infrastructure, and removing hindrances faced by self-employed folk like hawkers and cycle-rickshaw operators.

Critics will find such a budgetary approach unexciting. But the times call for dull solidity, not flashy excitement.

source: Economictimes

Tags: 2009 india budget, hot stocks, india 2009 budget, nse budget, pranab mukherjee, when is india budget

Similar Posts:

• The good in a bad year: things we did right in 2008
• Diesel price rise not likely till state polls
• Fiscal deficit seen at 4.8%
• Long Term Investors In Indian Stocks Should Not Worry
• Budget impact on various sectors: India Capital Markets