P Chidambaram had to balance politics (nine state elections and a national election), inflationary tendencies, economic growth, and efficiencies while presenting the Union budget for 2008-09. He has produced a sound political budget (but too late to help the Congress in elections) that will spend and stimulate growth, but not restrain inflationary tendencies and do nothing to improve expenditure efficiencies. 

Last year’s deficit reduction did not account for the bonds issued to oil companies and others. The claimed revenue deficit of 1.4 per cent  and fiscal deficit of 3.1 percent are hence understated by about 2 per cent. The proposed expenditures will only add to inflationary pressures. 

Tax revenues to Gross Domestic Product (GDP) ratio were 9.2 per cent in 2003-04 and 12.5 per cent in 2007-08. The buoyancy is due to superior information from modern information technology, better compliance because of lower tax rates and general economic buoyancy.

The Finance Minister emphasised the inflationary pressures because of rising world prices of crude oil, iron ore, copper, tin, wheat and rice and the short-term management of capital inflows for which India’s absorptive capacity is poor. Temporary measures are to manage capital inflows.

This is an implicit warning that liquidity will wax and wane, as will stop-go actions on foreign capital, while interest rates will not be reduced. With Indian stock markets ruled by foreign funds, they will see volatility, making raising fresh capital difficult. High interest costs will erode corporate profits even more than now.
The minister has set June 30, 2008 as the date for completing the write-off of Rs 60,000 crore of bank loans to four crore farmers (amounting to 4 per cent of all bank lending) demonstrates that this Parliament will not last this budget session. (The nuclear agreement with the US is another reason).

Another indicator of elections is the substantial supports for SC’s, ST’s and minority communities. Governments did little for them in past years. The UPA government is pouring money on them, obviously for their votes. Other social programmes of recent years also receive more attention – Bharat Nirman, Sarva Siksha Abhiyan, the National Rural Employment Guarantee Scheme, the special programmes for girls, mid-day meals scheme and the focus on minority employment in defence.

Such social programmes for the poor, women, SC’s, ST’s, minorities and farmers, are long overdue. They add a new social concern about inclusiveness of the poor and disadvantaged in economic development. They provide opportunities for them to improve their lives. But the procedural and administrative road blocks of passing the budget, then disbursing funds to executing agencies, will leave little time for their full and effective implementation. These social programmes may not swing any elections.  

The budget tries to accelerate manufacturing growth by reducing CenVAT by 2 per cent, cutting excise duties for pharmaceuticals, two and three wheelers, small cars, materials for housing and other such items. However, the two-wheeler industry is in decline because customers can buy cheap second hand cars. The Tata Nano and other low priced new cars will prevent two wheelers from benefiting much from this cut in excise duty.
The concessions for the power sector and especially for transmission and distribution, roads, urban infrastructure and housing for the poor will, along with the excise duty reductions, certainly help to stimulate demand for most of them. Not lowering peak rate of customs duty and hence no increased price competition by imported goods will please industry. The expected adjustment if not abolition of the tax surcharge and softening of the fringe benefit tax have not happened.

The removal of duplicate taxation on dividend distribution by subsidiary companies will be welcomed since companies can leverage lower equity with a lot more debt by setting up subsidiaries over which they can to retain control. This will help to start new businesses with less equity. The extension of 125 per cent weighted deduction to outsourced research by companies will also help the farming out of research to other laboratories and will improve innovation and new product development.   
 
Massive spending on higher education and skills development will help us earn our demographic dividend.
The write-off of Rs 60000 crore of farmer loans is no substitute for years of neglecting investment. Reimbursing banks is not mentioned. Write-offs penalise farmers who repaid loans and reward those who did not. It can wreck the stability of nationalised banks.

The Sixth Pay Commission report due in March 2008 will add to central and state expenditures and upset state budgets. The FM wants to monitor outcomes, not only outlays. The Planning Commission has a Programme Evaluation Organisation that should be doing this but apparently is not. Government employees benefiting from the Pay Commission are not measured for outcomes. Measuring outcomes is hampered by poor coordination within and between government departments. .

Using smart cards to improve the public distribution system is to be piloted. Its initiation, evaluation and extension will take time. The massive subsides (fertilisers, kerosene, LPG, food articles) will remain inefficient, missing many of the deserving and covering many who are not, and also wasteful and corrupt. This is a political budget unsuccessfully tempered by the FM's desire to improve efficiencies.