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The Interim Budget presented by Finance Minister P Chidambaram on Monday (February 17) was a strange one. It contained much praise for the ruling coalition UPA's entire tenure, peppered with some disappointments.
Mr. Chidambaram expressed some angst regarding the performance of the economy in the past two years — the worst during UPA's tenure. But he was quick to claim that today the economy is much more stable than two years ago as the exchange rate has stabilised, inflation has moderated and there has been a rise in the quarterly GDP growth rate. India is today the 11th largest economy in the world, he asserted, which has weathered the global financial crisis rather well.
The Finance Minister admitted that inflation remained a major worry, especially food inflation, and he admitted that the low manufacturing growth was not good for the economy even as he claimed kudos for his achievements on many fronts which seemed inappropriate given the current despondent mood of the common man or woman. There is no doubt that the UPA government has been faced with persistent inflation, high interest rates, high grade corruption, the rupee sinking to all-time lows in the past few months and the manufacturing and export growth declining to alarming levels.
The main bad news has been that GDP growth fell to 4.4 percent though it has picked up slightly in the last quarter. True, India has fared better than many countries in the post global financial crisis years but the low GDP growth from the double digit highs of just a few years ago, is rather ominous for a country with a huge youth population. Where will they find jobs if the economy is growing at below 5 percent?
Mr. Chidambaram's prescriptions for reviving the economy in the Interim Budget 2014/15 were aimed at boosting demand in the manufacturing sector. As there could be no direct tax changes because it was Vote on Account Budget (as the country is going to polls in April-May), he promptly announced various sops to encourage the automobile and domestic mobile phone sectors. India made mobile phones, SUVs, commercial vehicles, small cars and two wheelers will cost less due to a cut in excise duty announced by Chidambaram. Even ACs, TVs, laptops and refrigerators will cost less. He has also reduced excise duty on capital and non-consumer durables from 12 to 10 per cent. He has rationalized customs duty structure on non- edible grade industrial oils, fatty acids and fatty alcohols, to encourage domestic production of soaps and oleo chemicals. He even announced measures that would make rice cheaper as he has exempted from service tax various operations like loading, unloading, packaging, storage and warehousing of rice and other commodities. He has tried to encourage the domestic road construction machinery sector by applying countervailing duties on similar imported equipment even though it risks retaliatory measures. All the excise duty cuts will of course mean revenue loss but this would be the headache of the next government! On the whole, reviving demand is fine but the structural problems like infrastructure that have led to high transaction costs and responsible for the erosion of competitiveness, have not been addressed.
The Finance Minister emphasised his greatest achievement which has been containing the fiscal deficit to 4.6 per cent of the GDP. The Plan expenditure for 2014/15 will remain the same as in the previous fiscal year. By squeezing both Plan and Non Plan expenditure and subsidies, he has been able to contain the fiscal deficit. The brunt of the squeeze on Plan expenditure will be borne by the infrastructure sector. The government would sell shares of Axis Bank, Balco, Hindustan Zinc to raise Rs. 57,000 crore to garner additional resources.
Unfortunately interest payments on government borrowings will increase in 2014/15 which could be inflationary. He also said that the Current Account Deficit will be almost halved to $45 billion from $88 billion. He has taken credit for the rise in export growth but bemoaned the fall in import growth which indicates a fall in capital expenditure by companies and is the main reason behind the slow investment growth in the industrial sector. Low investment by corporates is largely responsible for the fall in IIP ( Index of Industrial Production) to low levels.
Mr. Chidambaram claimed rise in agricultural growth, pointing out that the growth has been at 4.6 percent and agricultural exports have risen to $41 billion. He denied that there has been any policy paralysis as 296 projects have been cleared by the government.
He pointed out that there has been an increase in power generation capacity during the UPA rule by 234,6000 MW and 50,000 MW of hydro and thermal power is under construction but the impressive growth in installed capacity only amounts to a growth rate of 7.6 per cent a year. He promised capital infusion in PSU banks to make them stronger. He also talked about All India Women's Bank and announced an increase in the Nirbhaya Fund by Rs 1000 crore. Thus women's empowerment figured in his speech significantly to please women voters.
Mr Chidambararam increased defence allocation by 10 per cent and endorsed 'One rank, one pension' for defence personnel. Farmers who repay loans on time would get credit at 4 per cent next year also. All these measures will go down well with the armed forces and farmers who are an important vote bank. There were various other thoughtful details in the budget like moratorium on interest on student loans taken prior to March 2009. Around 9 lakh students would benefit from this interest waiver.
Indian industry welcomed the Interim Budget and called it balanced. Above all, he claimed the reduction in poverty under the UPA government and claimed that 140 million people have come out of poverty in the 10 years of UPA rule. But about black money stashed abroad, there was very little new initiative. He predicted that the fourth quarter GDP of the current fiscal will be at 5.2 per cent which of course would depend on the new government's initiatives. He ended with an optimistic note which was full of nostalgia of having done his job (of Finance Minister) well! An era seemed to have ended.
By Special Arrangement with : Observer Research Foundation (www.orfonline.org)