Tinkerer Pranab has missed the bus - so what's new?

Mountains of expectations always deliver a mouse. And so it was with Pranab Mukherjee’s make-or-break budget. He neither made much of the opportunity nor broke anyone’s back by trying to do too much.

The net verdict is this: Revenue has been beefed up, but expenditures are not quite in check. Thus, fiscal consolidation is still one-sided. Big reforms have been given the go-by. Small crumbs have been thrown at the middle class in terms of tax relief, but the price increases due to the raising of excise and service taxes will more than neutralise this gain.

The macro numbers first: the big thing that was expected from Mukherjee was a sharp drop in the fiscal deficit, which he delivered, by bringing it down from 5.9 percent in 2011-12 to 5.1 percent. A big drop by0.8 percent is good news, but the devil will be in the detail: how did he achieve it?

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The chances are he will miss the target once again because the cut is being achieved through raising taxes - the net additional taxes from customs, excise and service taxes will be Rs 45,940 crore while the crumbs on direct tax concessions equal Rs 4,500 crore. The net tax gain for Mukherjee: Rs 41,440 crore.

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The question is: in a period of slowing growth, will his revenue projections really live up to expectations? When last year he missed almost all targets?

The big money (at least, what is planned) is coming from an across-the-board two percent hike in excise and service taxes to 12 percent, and the extension of service tax to every nook and cranny of the economy - only 17 services are exempt. Revenues will certainly go up.

The concessions are fleabites: an increase in the tax-free exemption limit to Rs 2 lakh - that’s a Rs 2,000 tax relief per individual. Rs 10,000 of interest earned from banks will be tax-free, but this is more a sop to banks - who are screaming about tax-free bonds and high payments on post-office schemes that are taking away customers. Senior citizens have been spared the payment of advance tax - but this is like making life easier, not about providing more money in the pocket.

The salaried and the old can say thanks, but no thanks.

All this would have been tolerable in a difficult year if Mukherjee had really taken the axe to big-ticket waste. But the FM has simply not taken the tough decisions to cut expenses. While he talked of raising petro-fuel prices - which may happen outside the budget, and get Mamata Banerjee’s back up once again - his subsidy bill is still looking huge: Rs 43,580 crore on fuel, Rs 77,794 crore on fertiliser, and Rs 75,000 crore on food subsidy.

That’s a clean Rs 1,96,000 crore-and-odd.

Any bets this won’t be the final bill when Mukherjee presents his next budget (assuming UPA is around and he is still FM)? Quite obviously, Sonia Gandhi’s Food Security Bill is inadequately funded. Also, there is a good chance that fuel subsidies will be higher if the world economy rebounds and oil prices stay high.

According to current estimates, oil industry under-recoveries on subsidised diesel, cooking gas and kerosene are upwards of Rs 1,40,000 crore annually. Even if one assumes that a part of the money comes from ONGC, Oil India and Gail - as it does now - the Rs 43,580 crore provided for fuel subsidies will be grossly inadequate assuming international prices stay at the current level.

If diesel prices are raised to make up for the short-fall, and excise and service taxes are up, it means inflation will get a cost push across-the-board. If this happens, what are the chances that the Reserve Bank of India will cut rates fast?

Duvvuri Subbarao will not be amused. Which is why he held back on the repo rate cut on Thursday. Now he may play hard-to-get in the April monetary policy, too.

As things stand, the diesel under-recoveries are at Rs 12.17 per litre of diesel, Rs 28.66 per litre in kerosene, and Rs 439 per cooking gas cylinder.

If prices are raised to cover even half the level of losses incurred by the oil marketing companies, we are going to have higher inflation and possibly street battles led by Mamata & Co. Kolaveri Didi will be on the warpath, not to speak of a whole host of Kolaveri Dadas in the opposition parties.

Assuming prices are not raised, the budget deficit is likely to go through the roof again - as it did last time.

Either way, whether the deficit goes up or not, prices will go up. This will dent GDP growth rates which the Economic Survey had pegged it at 7.6 percent on Thursday. One can kiss goodbye to that.

To mollify the poor, who will surely be upset over inflation, token soak-the-rich taxes have been imposed on large cars (excise up and also customs), gold and platinum. Sin taxes are up on cigarettes and bidis. But it is the budget arithmetic that will go up in smoke.

Pranab-da’s efforts are neither here nor there. At the end of the day, it’s clear that this is not a budget that will fix the deficit problem, or build business confidence where investment will revive in a big way.

Pranab Mukherjee has more or less missed the bus.