Budget 2012: Why it's difficult to believe the FM this time

by Senthil Chengalvarayan

He has done it again, asked us to suspend our credulity. I did it last year and raised a placard to signal that I thought budget 2011 deserved a “GOOD” when Rajdeep asked me how I rated it for effort at the CNN IBN studios. Today though when I was asked the same question I raised a smaller placard that read “BAD”.

Last year I took the Finance Minister at his word. I had naively thought he would make policy to help achieve the ambitious targets he had set himself. Today I am afraid the record his Party has set in the last year worked against the Finance Minister, not just with me, but with all of us in that rather packed studio, and the pity is that most of us gave him a thumbs up on budget day last year.

This year I wasn’t looking for big reform. I wasn’t looking for a statement of intent on FDI in retail or Aviation or Insurance. I wasn’t looking for a for big bang divestment, all of which I understand are difficult to do with the Allies Mr Mukherjee has. I wasn’t even looking for a roadmap for GST, I am one of those who thinks the Finance Minister has done his best here and can’t give in to the demands of blackmailing state governments. I wasn’t looking for that “big idea” that us TV anchors love to ask our guests to identify in budgets. All I was looking for was some credibility in the numbers that were presented. As he began his speech I applauded his intent to keep the deficit down to 2% of GDP this year and to bring it down to 1.7 percent the next. It looked like he meant it when he said that it was time to get back to the targets that were set by the Fiscal Responsibility and Budget Management Act.

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[caption id=“attachment_247780” align=“alignleft” width=“380” caption=“It’s been a bad budget this time. PTI”]  [/caption]

Then came the refreshing candor, the admission that this year he had muffed his austerity test and the Fiscal Deficit would soar by over a fifth to 5.9% from the 4.6% he had budgeted for. This was followed by the reasonable estimate of the Fiscal Deficit for next year, 5.1% that was right at the upper end of street expectations, but seemed believable.

But as the bewildering speech wore on the memory of that bright spot faded. What followed was a hotch-potch of various allotments to various ailing sectors of the economy with no clear strategy on how they would pull together. As it became clear that he had no road map to achieve his growth targets and we got first glimpses of the fine print, it became more apparent that the assumptions didn’t add up. Right on top of the speech he had said growth that had dropped to 6.9% would move to 7.6%. This seemed a reasonably achievable number to a roomful of experts who not too long ago had lived in time of half a decade of almost 9% growth. But with no mention of what he proposed to do to spur corporate confidence other than a general assertion about building consensus on reform, 7.6% looked like a mountain to climb for an economy that in the last three months has been trending at below six-and-a half percent. And if that kind of growth was not going to be achieved the 15 percent increase in expenditure that Mr Mukherjee proposes in his budget looks run away and the 5.1 percent fiscal deficit figure like a number that he had pulled out of a hat.

With the growth target in doubt so are the assumptions on revenue; so that would mean the higher than expected market borrowings, which at a budgeted Rs 4.79 lakh crore could be higher. Factor in the inflation that would result from the hike in excise tax rates and the expansion in the service tax net which is expected to impose a Rs 42,000 crore on consumers, and a possible hike in fuel prices and suddenly an interest rate cut that looked likely in April, doesn’t seem so certain any more.

So with no signs of interest rates softening and no sign of any other vision to get investment back on track, the mood began to drop. And then came the bombshell on CNBC TV18 as they reported that the Vodafone tax case was back in the headlines. The fine print in the Finance Bill contained a proposal to amend the Income Tax Act all the way back to 1962 that would enable the government to claim the Rs 11,000 crore in taxes that the Supreme Court had said it had unfairly asked the company to pay. Now the government is empowered to pass this kind of legislation, but what it just did was to add to the uncertainty of an already muddied investment climate.

But then this was that kind of budget, bewilderingly muddled about what it wanted to achieve.