The budgets that don't inspire

Three budgets have come out between February 25 and 28 — Karnataka, Indian Railways and the Central government. The challenges before Karnataka are to improve agricultural production, accelerate infrastructure development, prepare vulnerable areas of the state for climate change, conserve rapidly depleting groundwater, improve power availability and the finances of the state distribution enterprises, and invest much more in health, education and nutrition of the poor.

The challenges before the Railways were to improve the deplorable finances, increase freight carriage especially of vital goods like coal, iron ore, foodgrains, etc, improve safety, security and cleanliness, push metro and urban rail development, and expand the network.

The Centre faces the challenges of runaway food inflation, high fiscal deficits, high current account deficit, volatile financial portfolio inflows, declining foreign direct investment, improve earnings of farmers and agricultural productivity, substantial tax evasion evidenced by the estimates of black money and illegal overseas holdings, reformation of the tax system, etc.

Just giveaways

Karnataka claims to have given priority to agriculture but it is more in giveaways. Measures to improve production include cash subsidies for bringing dry lands into cultivation, free replacement of pumpsets. It pays less attention to infrastructure and especially in Bangalore. Despite shortfalls in generation it budgets little for power purchase. It makes no reference to climate change. It cuts expenditure on health.
The railways continue the obnoxious practice of pouring projects into home states of Railway ministers. West Bengal gets the majority of projects, though she has added a little for the poll-going states of Tamil Nadu, Kerala and Assam. There seems to have been no attempt by the prime minister and his Cabinet to bring a better balance to the budget’s geographical coverage of benefits.

The budget admits to being short of resources and will raise it by market borrowings. She talks of safety, security, cleanliness, more freight carriage, more metro and urban trains, but has neither the finances nor the managerial leadership to achieve them.

The Central Budget was welcomed by the stock markets possibly because government borrowing is to decline, corporate taxes will reduce with a cut in the surcharge, middle class investors will have more money because of tax slab changes, foreign funds can invest in Indian mutual funds, and some possible concessions to foreign investments in banking and insurance.

The fiscal deficit is to be 5.1 per cent this year and 4.6 per cent in the new year, a matter for some conjecture since the large windfall gain from spectrum sales will not be available in 2011, though disinvestments will continue. This finance minister says he has been transparent on all expenses. The goods and services tax is to have a constitutional amendment during the year, giving India a true common market.

There is no specific proposal to improve the governance deficit, reduce corruption and black money and bring back illegal moneys held by Indians abroad. But the introduction of cash instead of physical transfers to below the poverty line families of kerosene, fertilisers and LPG, is a welcome development. It will reduce corruption and more so if it is extended to foodgrains distribution as well.

It does nothing to contain the flow of volatile foreign funds through the Mauritius tax gap and participatory notes, or to reduce the high current account deficit. It does however permit foreign investment in mutual funds, which might be less volatile investment in shares.

The budget does little to discipline uncontrolled and inefficient state spending which have left many states with little resources for health, education and nutrition programmes for the poor. State governments spend lavishly on populist programmes like free power to agriculture, resulting in huge and mounting electricity board losses, and do not want accountability to beneficiaries through local bodies like the panchayats.

The 12th Finance Commission had recommended some direct transfers but these are very small in relation to total Centre-state transfers.

On balance the Centre’s budget is a little boring, with little big reform except cash transfers in some instances, and does not deal with the burning issues of food inflation, high current account deficits and poor state government accountability.

However the reforms in hand like Aadhar, goods and services tax, direct tax code, will help to transform governance in future years. So will cash transfers help reduce corruption. However, black money and illegal holdings abroad need other corrective actions that are not yet in sight.