Let me confess, I am not all the excited to write about Budget 2012-13, I am genuinely disappointed as a taxpaying citizen of this country, and I couldn't find a better way to express my disappointments but to write a blog and share my perspective. Let’s look at the pre budget scenario before actually analyzing the important aspects of this budget, we will in particular discuss in detail the opportunities missed by the Government to set the growth trajectory on track.
These are no normal times to have a normal ‘status quo’ budget, in the last decade, India was considered a ‘low-cost high-growth’ economy and the present Government has been extremely successful in transforming it to a ‘high-cost low-growth’ economy. For seven successive quarters, which aggregates to 21 months, India's has recorded a steady decline in GDP, from 9.4% in Jan-Mar 2010, to 6.1% in Oct-Dec 2011, and the worst is yet to come, going by the current trend, I expect India to register a sub 7% GDP growth in 2011-12. Cost of subsidies is set to cross 2.5 lakh crore, borrowings are expected to hit the roof at 5 lakh crore, and fiscal deficit will surpass 5.6% of GDP. While fiscal deficit of over 5% is tolerable (given the fact that we don’t have a choice) if the economy grows at over 9% and domestic savings rate at 35% of the GDP, alas, both seem a distant dream in the current scenario.
While the Government argues that the reasons for the slowdown are exogenous and driven by global factors, truth is that the crisis indeed is a ‘self made disaster’. The Govt states that the reason for the worrisome fiscal situation is on account of the economic stimulus announced in 2008, but the fact of the matter is, it is the political stimulus (read sops to woo voters) that accounts for the major chunk of Govt borrowings.
Now coming to Mr. Pranab Mukherjee, I have great respect for this man, no one can level any personal allegations against him, all leaders across parties have great respect and faith in him, well is that good enough qualification to be the finance minister of a dynamic economy like that of India? Read on.
Pranab Mukherjee is better known as the troubleshooter for Congress than as the finance minister of India, he is the fire fighter for every ally and crises in the UPA. He is the Chairman for largest number of EGoMs (Empowered group of Ministers), he is often reckoned by the party high command to solve political differences with its allies and the opposition, well he also ‘happens’ to be the finance minister.
A complex economy like India which is need of a full time finance minster, ironically has the busiest politician of the UPA for the post. Every minute and hour he spends on political schema, has an adverse bearing on the economy. There is always an ongoing clash of interest between Pranab Mukherjee the FM and Pranab Mukherjee the politician, what can Pranabda do? How does he set his priorities? FM Mukherjee is aware of the fact that there is a pressing need to curb subsidies, but the politician in him doesn't allow him to act in that interest. Very unfortunate, isn't it.
High cost of money..
High interest rates restrain investment activities in the Economy, but to bring down the interest rates, the Govt has to reduce its borrowings. The startling fact is, when the UPA came to power, the Govt's borrowings stood at Rs. 200 crore a day, the figure currently stands at a whopping 2,500 crore a day!! This is freakin alarming and the situation demands bold measures to curb revenue spending, austerity measures which are quite easy to preach are seldom practiced. The UPA regime hiked the interest rates by 5.25% in less than 18 months, which business can handle doubling of interest rates coupled with slowing growth?
The NDA Govt had earlier enacted the "The Fiscal Responsibility and Budget Management (FRBM) Act" in order to check the raise in Fiscal deficit, as a result the Fiscal deficit declined to a low of 2.5% of GDP in 2007-08 of which only 41.4% was revenue deficit. The very next year the fiscal deficit was allowed to go up to 6% of GDP and revenue deficit from 1.1% to 4.5% of GDP. In percentage terms, the share of revenue deficit in the overall fiscal deficit increased from 41.4% to an alarming 75.2%, it further rose to 80.7% in 2009-10.
Fiscal deficit can arise either on account of Capital expenditure or Revenue expenditure. Revenue expenditure in principle is considered to be unproductive in nature, it primarily comprise of consumption expenditure of the economy. The so-called stimulus package announced by the Govt in the wake of 2008-09 crises, largely accounted for consumption expenditure of the economy which simply cannot be rolled back unlike a Capex focused stimulus package which could be rolled back once the economy is out of crises. This has also eroded the credibility and moral authority of the Govt to advise the State Govt's to check their respective fiscal deficits.
The ever-increasing deficit, on the absence of solid policy measures to remove supply side bottlenecks, has only resulted in sky rocketing inflation, especially on essentials, which has forced the RBI to raise interest rates and squeeze liquidity, thereby money becoming an unaffordable commodity for the private sector, and as a result, all planned investments were stalled, so were creation of new jobs.
Hike in Service Tax and Central Excise..
We saw how fiscal deficit and reckless Govt borrowings have fueled inflation. For nearly three years our economy has been battling inflation and slow growth, high prices of essential commodities have continuously eroded the purchasing power of an average Indian consumer, high inflation and high rates of interest have been the primary cause for decrease in consumption and private investment. Any reasonable common man would expect the Govt to announce stringent measures to curb inflation in the Budget speech, but look at what the Govt did to address issues pertaining to inflation and growth? It imposed a mighty 20% hike in excise and service tax on goods & services, from 10% to 12%, which will further induce inflationary pressure and thump consumption in the economy which is already battling a sub 7% GDP growth.. Poor economics? Read on.
Taxing Derivatives...
We saw how the Govt has completely screwed the country's fiscal situation, now that calls for innovative ways & means to raise Govt revenue and cut unwarranted spending to check the burgeoning fiscal deficit, isn’t it. The Finance Minister is expected to look at new sources of revenue to fix the plug rather simply tampering with the existing tax rates, like it did with Excise and Service tax.
After the introduction of service tax by the NDA, there were hardly any innovative measure to raise revenue, tampering with existing rates of service tax, central excise will only increase the inflationary pressure which simply does not solve any purpose. There is one such area which has huge potential, but seemed to have completely missed the FM’s radar, intentionally or unintentionally is a question which I am not equipped to answer.
While there is Securities Transaction Tax (STT) on all stocks bought and sold by retail investors irrespective of whether they makes profit of loss, why isn't the Govt taxing transactions pertaining to speculative Derivatives traded on Stock, Forex and Commodities market? The total derivative turnover in stock markets is Rs. 1,92,48,200 crore, in forex markets its Rs. 3,46,00,000 crore, and in commodity markets, it's Rs. 1,37,00,000 crore. The sum total of the derivatives traded is Rs. 6,75,48,200 crore..!!!
Tax of 10 paise per Rs. 100 derivative will yield the Govt over Rs. 70,000 crore!! It doesn't stop here, it is these feckless derivative transactions that distort the value of Rupee more than the actual transactions, and it is derivatives which cause huge swings in commodity prices, the resultant of which is skyrocketing inflation which drags the economy to the vicious cycle of high interest rates, low investment and poor job creation. Therefore taxing derivative transactions will not only be resourceful in generating additional revenue for the Govt but will also check reckless speculation by traders who trade in derivatives. I am cent percent sure that a tax of 10 paise on Rs. 100 derivative will not burn the hands of genuine users of Derivatives who use the instrument as a tool to hedge, but this will certainly work against the speculators who make money day in and day out trading derivatives.
If only our finance minister been a little more imaginative and announced Derivatives tax in his budget speech, it would have opened up additional stream of revenue to the tune of Rs. 70,000 - 80,000 crore, which would have been instrumental in curbing the fiscal deficit, but our beloved Pranabda has again failed to act in the interest of the economy, yet another opportunity missed..? This is a move which no ally would dare to contest on the floor of the house, Mamata inclusive.
On the whole, the finance minister and the Govt have collectively failed to capitalize a wonderful opportunity, both to raise new stream of revenue as well as to curb discretionary Govt spending on borrowed money. On the contrary, it has taxed consumption by hiking the indirect taxes, which will invariably kill growth and fuel inflation. If I were to sum up the Union Budget 2012-13, it is an “Opportunity Lost” by the finance minister to have set the growth trajectory back on track. Is anyone listening..?
Jai Hind
