Most analysts would term the budget for 2008-09 as a populist one intended to provide a fiscal stimulus for fighting elections rather than either for growth or “inclusiveness” – and their assessment would be correct. Apart from the two major initiatives relating to waiver of debts of farmers and income tax concessions for the middle class, the budget does not contain anything of note. In a major departure from the past, the budget does not provide major concessions to the corporate sector except for marginal tinkering with sector-specific indirect taxes – both import and excise duties. 

How much accolade is actually due to the finance minister for his two key initiatives? The scheme of debt relief for small and marginal farmers includes the complete waiver of all loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008 while for other farmers there is a one time scheme (OTS) consisting of a rebate of 25 per cent against payment of 75 per cent of all loans that remained overdue and unpaid on the same reference dates. The total value of loans being waived is estimated at Rs 50,000 crore plus an additional Rs 10,000 crore under the OTS and is estimated to benefit about four crore farmers. The implementation of the debt waiver/relief scheme is to be completed by June 30, 2008.

Given the nature of growth occurring under this globalising regime, any relief to those marginalised sections who are out of the ambit of the growth process is to be welcomed. However, there is a different issue involved viz. the question of who is to bear this burden of Rs 60,000 crore. As this sum is not a budgetary outlay, it is intended to be sustained by the banking system. Specifically, it would be borne by the scheduled commercial banks, the regional rural banks and the co-operative credit institutions, of which the latter two are public-sector institutions.

Among the scheduled commercial banks, the private sector component operating in rural areas is extremely small (while multinational foreign banks in villages are virtually non-existent). Therefore, almost the entire burden of Rs 60,000 crore would be borne by public-sector banks, impacting significantly on their asset portfolio and consequently, their profitability. Ironically, it is very probable that subsequent finance ministers would cite the lower profitability of these very same banks as an indicator of public-sector “inefficiency” vis-à-vis private sector banks.

The second major claim to populism of this budget is the increase in the exemption base of the personal income tax and the widening of the tax slabs. While the tax relief to the middle class is indeed sizeable, one is again forced to raise a caveat. From the 2005-06 budget, the basic exemption limit as well as the higher tax brackets have been left virtually unchanged except for a marginal upward revision of Rs.10,000 of the basic exemption limit in the 2007-08 budget. Given the average increase of about 5.5 per cent per annum in the consumer price index over the past three years, this would imply that the real incomes (post-tax) were, in fact, decreasing due to “bracket creep.”

Bracket creep occurs in any progressive tax regime due to indexation of wages to inflation which, through the dearness allowance, results in higher monetary incomes which get pushed into the higher tax brackets and become subject to tax at higher rates. Preventing bracket creep and a consequent erosion of real incomes requires constant upward revision of the tax slabs. What has been presented as a major concession to the middle class is simply a fiscal correction which should have been done routinely every year.

The middle class would, in general, welcome the reduction in excise duty on small cars from 16 to 12 per cent, on hybrid cars from 24 to 14 per cent and on two-wheelers from 16 to 12 per cent. It remains a matter of conjecture, however, as to how much of this tax benefit is passed down as lower prices and how much is retained by the benefiting companies to increase their profits.

Government and quasi-government employees would be disappointed that there is no explicit sum earmarked for the anticipated increase in salaries (as well as payment of arrears) consequent to the Sixth Pay Commission Report, which is expected to be submitted by March 31, 2008. This could well be an indicator of from when the recommendations of the commission will be implemented. Non-implementation of the Report from January, 2006 will rightly be a matter of concern for the employees of both the central and state governments – with the pay hike of the latter normally linked to the increase in pay of employees of the central government.

The resigned acceptance by the corporate sector to the somewhat limited concessions offered in this year’s budget would seem to be indicative of their realisation as well of the forthcoming elections. There is no lowering of the corporate income tax rate or the rate of surcharge. The peak rate of customs duty also remains unchanged though there is a lowering of duty on select items. Excise duty on specific commodities has also been lowered and this combined with the reduction of the CENTVAT rate from 16 to 14 per cent is expected to provide a fiscal stimulus to the manufacturing sector.

The electoral race has indeed been flagged off by the Finance Minister.

(The writer is a Reader with University of Delhi.)