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| A Budget that defies Finance Minister | | | S Gurumurthy | 3/26/2012 1:00:54 AM |
| Pranab Mukherjee vowed to stimulate domestic demand, but went right ahead and raised indirect taxes to a level from where there can only be an immobilising effect. He also promises the mutually contradictory "lower inflation and higher savings" The national Budget for the financial year 2012-13 is a theatrical cocktail of contradictions between the expressed intents of the Finance Minister and the contrary contents of the Budget and of the conflict between Anglo-Saxon economic theories and Indian culture and sociology. And, given the chaos within the UPA government and coalition, it mirrors the Finance Minister's confusion about what to do and what not to do in the light of his doubts about what the UPA government itself can and cannot. First, the Budget is undeniably noble in words but admittedly short on numbers. The bad numbers undo the declared intents of the Finance Minister and work to the opposite of the laudable objectives declared. Here is an example of how the Budget works against the professed objectives of the finance minister. The Finance Minister says that a principal objective of the Budget is to 'focus on domestic demand driven growth for recovery'. With the world in turmoil, the Finance Minister has rightly turned Swadeshi to look to domestic strength as the alternative. But his Budget contradicts his vow in the Budget speech. If he has to spur domestic demand, he would have cut taxes and let people have more money to spend. But here he has raised taxes and robbed the people. He puts into consumers' pocket a paltry sum of Rs 4,500 crore by direct taxes cut, but picks their pockets almost by a huge amount of Rs 46,000 crore by raising indirect taxes. Even the minister cannot deny that this will erode, not promote, domestic demand. Result: far from activating domestic forces, the Budget in effect immobilises them.
Next, the Finance Minister expresses hope that the Budget would produce 'lower inflation and higher savings' in the coming year. Lower inflation, higher savings and higher consumption are all contradiction in terms. In theory, other things remaining the same, a rise in savings results in lower consumption as the households would have less money left for buying and therefore domestic demand would be lower. Again, if a Budget releases inflationary forces by high rises in indirect taxes, as the present Budget promises to, the same or less goods, will sell at more prices - causing fall in real consumption. When inflation strikes, both real consumption and savings goes down. Rise in indirect taxes in the Budget would result in price rise and reduce savings. And when prices rise, not just savings, real consumption also would fall. The Economic Survey 2012 laid by the Finance Minister himself the day before the Budget, notes that inflationary tendencies during 2010-11 caused reduction in household savings. It does not stop here.
The projected gargantuan government borrowings of Rs 4,70,000 crore for 2012-13 would suck away the liquidity and up the interest rates. The minister himself has provided for a huge interest burden for the Budget year. Already, even ahead of the Budget, banks are borrowing heavily from Reserve Bank. If the high interest rates, which are already high, now rise further, that would also bring down consumption. Allowing FIIs to invest in government and corporate bonds cannot greatly ease the illiquidity. In sum, with the inflationary tax element in it, the budget promises lower, not higher, savings and consumption, the very opposite of what the Finance Minister has declared as the objective of the budget. The domestic demand theme of the Finance Minister is put on brakes by the budget - i.e. the Budget defies the Finance Minister.
Take an example of the conflict between Indian sociology and Anglo-Saxon economics in the budget. Like every Finance Minister since 1991, Pranab Mukherjee has also attempted to solicit more subscribers for corporate stocks - a vital element of Anglo-Saxon financial capitalism. He has given a deduction up to Rs 50,000 for those who subscribe for stocks. The punters in the stock markets who had had to pay tax on their gains a decade ago, were exempted and left with a small turnover tax (securities transaction tax) to bear. The corporates, FIIs, and also the government would like the households in India to move away from banks to stocks. But Indian households, like the Japanese and German households, refuse to do so. In Germany, less than 7 per cent of households own stocks and Japan 11 per cent, against 55 per cent in the US. Most Germans and Japanese prefer bank accounts to stocks. The Anglo-Saxon economists consider that inefficient. Indian households are similar to German and Japanese households in seeking safety first. The Economic Survey of India, 2012, submitted by the Finance Minister to Parliament the day before his Budget testifies to how the Indian household trust banks more, despite the rise of Sensex from 1000 in 1990 to over 18,000 now, topping 20,000 at times. The total savings of Indian households in banks was 34 per cent of GDP in 1990. It rose by over a third, to 47 per cent in 2000-01. It further rose to 58 per cent in 2006-07. It continues to rise and stands at present at 67 per cent, thus doubling in two decades. During this period, when the Sensex rose by 20 times, Indian households had largely kept away from stocks. The share of stocks in Indian savings was some 7 per cent in 1992 thanks mainly to Harshad Mehta. It crashed to 1.7 per cent in 1999. It rose to 4 per cent in 2000, this time thanks to Ketan Parekh. It crashed again to almost 1 per cent in 2004-05. It again rose to 8 per cent, this time around thanks to global subprime scam. Now it has again crashed to some 3 per cent. So scams, more than tax sops, seems to have enticed the households to stocks. Yet, the Budget is again enticing the households to stocks. Unable to contain the huge revenue deficit, the Finance Minister seems to have turned to chartered accountants for ideas to make his balance sheet appear more elegant. The innovation of 'effective revenue deficit' bears the stamp of some questionable multinational accounting firm which dresses up bankrupt corporate balance sheets into elegant ones. Thanks to such expert advice, effective revenue deficit is to be arrived at by deducting from 'the revenue deficit' all grants made - not only to state governments and constitutional authorities, but also to NGOs - for creation of capital assets not owned and held by the government. This innovation is being legalised by amending the law regulating government finances. Thanks to this 'fair and lovely cream' formula, from the revenue deficit of Rs 3,50,000 crore the grants for capital assets of Rs 1,65,000 crore are deducted to arrive at the effective revenue deficit of Rs 1,85,000 crore for 2012-13, optically moderating revenue deficit of 3.5 per cent of GDP to 1.8 per cent effective revenue deficit.Yet, the Finance Minister's effort is not without positive elements.
The bold, retrospective law to tax the Hutch-Vodafone deal, the novel idea of having a holding company for the financial arms of government and the proposal for direct delivery of subsidies are some examples. The Finance Minister's show finally ends as a comedy with his promise to bring a 'White Paper' on Black Money! It is now three years since the UPA II government had promised by the President's address to Parliament after the 2009 Lok Sabha election that it would bring back Indian monies stashed away abroad. Now, after three years the Finance Minister says he will bring a White paper on the issue! Isn't it a comedy ? (The writer is a commentator on political and economic affairs)
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