Is the budget 2008 presented by Finance Minister P Chidambaram an exercise in consolidating constituencies for electoral victory or an earnest effort to redistribute the spoils of economic growth to the marginal sections? Opinions may differ.

But a post-mortem of the budget suggests a mix of populism and an over confidence on the growth of the economy in spite of the shadow of a slowing global economy. That makes the budget analysis pretty interesting.

India’s budget for the fiscal year starting on 01 April 2008 envisages higher spending on health and education ostensibly to spread the benefits of an economic boom beyond the cities to rural voters and offers to raise the income tax threshold. The effort of Finance Minister P Chidambaram to address the aspirations of farmers and the middle class has already been met with the criticism as populist measures to garner votes for the parliamentary elections due for next year.

Thanks Giving

The highlight of the budget was the Rs 60,000 crore or US$15-billion loan bailout for small and marginal farmers. It was announced that the loans of some 30 million indebted farmers would be fully waived and another 10 million would receive aid as one time settlement. The farm sector provides a living for two-thirds of India’s 1.1 billion population.

As many as 1,50,000 debt-hit farmers have killed themselves in the past decade according to the Tata Institute of Social Sciences. Alarm bells had been ringing on the slowing farm growth, which was forecast to 2.6 percent this fiscal year from 3.8 percent the previous year. There was an overwhelming feeling in political circles that India’s food security and social harmony will be in distress if the vital sector is neglected further.

In the words of the FM, “The country is discharging a deep debt and sense of gratitude to farmers” through the loan waiver scheme. The Harvard-educated minister reiterated the government’s vision “to make growth more inclusive” to all those bypassed by the economic boom.

Rural Slant

Chidambaram has also given due focus to irrigation and crop insurance schemes. This may boost tea, cashew, pepper and coconut sectors. The irrigation sector has got 200 billion rupees. The allocation for rural job guarantee scheme has been raised from 60 billion rupees to 160 billion rupees.

The emphasis on health, education and the rural economy do suggest the undertone of populism in the budget. Fobbing off charges of populism Chidambaram defended himself saying, “the government’s aim is to boost employment and abolish poverty and inequality in the country of 1.1 billion people”, where some 260 million struggle on less than one dollar a day.

The Figures

The Budget puts total spending at 7.51 trillion rupees (US$188.5 billion) for the fiscal year, which is up 6 percent, including a 10 percent increase in defence spending. Revenue is forecast to rise almost 15 percent.

Boosting Consumption

Ostensibly to thwart any slowing of demand, the finance minister has neatly packaged the stimulant to boost consumption through a combination of lower taxes for middle class and reduced excise duties on consumer goods. This would spur the auto, banking and pharma sectors. More disposable income for consumers will also spur growth of housing sector and resultant investment in construction industry.

Fiscal Management

According to the FM, the federal fiscal deficit would fall to 3.1 percent of gross domestic product in 2007-08, beating a target of 3.3 percent. Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

The deficit target for 2008-09 would be 2.5 percent, below a 3 percent target enshrined in law. Gross market borrowing for 2008-09 was put at 1.45 trillion rupees, lower than a market forecast of 1.65 trillion.

According to the FM, this leaves headroom in case more borrowing was needed. The minister also did not specify provisions for higher government workers’ salaries; a pay commission will submit a wage review soon.

Though reduction of the fiscal deficit in 2008-09 to 2.5 percent is positive, it may not include the impact of the pay commission, so it could be higher than the forecast. The government said it would need another year to meet a legal goal of eliminating the revenue deficit, the gap between tax revenues and current spending, due in the coming fiscal year.

Elbow Room for FM

A stunning three-year economic performance has enabled the government to fund the handouts without derailing its finances. The fiscal deficit has again beaten Budget targets (3.1 percent against an estimate of 3.3 percent), and the revenue deficit at 1.4 percent is on track to the target of 0.5 percent.

Revenue deficit happens when the net amount received (revenues less expenditures) falls short of the projected net amount anticipated. This occurs when the actual amount of revenue received and the actual amount of expenditures do not correspond with predicted revenue and expenditure figures.

Scary Inflation

High interest rates last year have slowed consumption, and data showed annual growth in the US$1 trillion economy slipping to 8.4 percent in the December quarter from 8.9 percent in September. India clocked 9.6 percent in 2006-07, its fastest pace in 18 years.

Confident that India would grow by 8.8 percent in the fiscal year ending on 31 March, Chidambaram said turbulent financial markets and high commodity prices formed the risks.

“Managing the supply side of food articles will be the most crucial task in the ensuing year,” the FM cautioned.

Simplified Tax Regime

On the whole, the budget looks like an exercise in simplifying the tax regime — a long-standing demand of the industry — while providing incremental tax relief to the professional and business communities.

Industry Depressed

The FM left Corporate Tax rates unchanged and raised tax on short-term capital gains, aimed at sharing transactions to 15 percent from the existing 10 percent. The industry is not very happy.

Indirect Tax Cuts

Though there is no change in the proposed corporate tax or surcharge rates, the move to address double taxation in the special purpose vehicle (SPV) structure due to dividend distribution tax is widely appreciated. Similarly, reduction in CENVAT (by 2 percent), cut in Central Sales Tax (CST) and Custom Duty relaxation on project imports are hailed as positive developments at the indirect tax front.

With regard to the core infrastructure segments, greater allocation for national highways (up by about 20 percent to Rs 12,970 crore) and urban infrastructure (to Rs 6,870 crore) are heartening declarations.

Sops for Service Providers

The threshold limit of exemption for small service providers will be increased from Rs 8 lakh per year to Rs 10 lakh per year. As a result, about 65,000 small service providers will go out of the tax net.

New Institutions

The formation of an Irrigation and Water Resources Finance Corporation with private sector and multilateral funding and more funds for the Rural Infrastructure Development Fund are healthy signs. Also on the anvil are a National Fund for Transmission and Distribution reform in the power sector, SWANs (State-Wide Area Networks) and one lakh Internet-enabled broadband Common Service Centres to broaden connectivity are significant steps.

For the first time, a body to launch a world-class skill development programme with an outlay of Rs 15,000 crore is mentioned though it is unclear why the Finance Minister wants it to be “non-profit”.

A Matter of Confidence

The FM is put in a salubrious mood by the taxpayers thanks to the collection in the coffers in 2007-08 escalating to unprecedented heights, taking the tax-GDP ratio from the estimated 11.8 to 12.5. It also helped contain revenue and fiscal deficits at 1.4 percent and 3.1 percent respectively. This is further supplemented by a jump of 36 percent in investment and savings. These trends will undoubtedly push the economy further forward.

Moderating Capital Inflows

High capital inflows last year had complicated monetary policy by pushing the rupee up against the dollar. Says Chidambaram “In the long term the economy must be able to absorb more capital. In the short term it is our responsibility to manage the flows more actively.” Net foreign portfolio investments have already crossed US$18 billion while the rupee has appreciated by 8.9 percent against the dollar.

It is Fine

Even in the middle of the tight ropewalk to balance the political compulsions with the imperatives for sustained growth, Chidambaram has ensured that the nation’s growth agenda does not get derailed, and all critical sectors such as infrastructure; education; public health as well as agriculture are adequately supported.

Strong measures proposed to stimulate consumption; boost demand and manufacturing activity, reduction of Excise duty and reduction in the Customs duty on project imports are force multipliers for the economy. The reduction in the Customs duty on project imports will certainly stimulate the manufacturing sector and lead to growth in investment.

Challenges

However, the downside risks such as continued recession in the US affecting the demand for goods and services, possible surge in prices of oil, commodities and food grains, shortfalls in the performance of various sectors, especially in the realm of exports and inflationary pressures continue to linger on.

Of Slowing Economy

Some analysts do see trouble brewing in the fiscal front with the US$15-billion loan bailout for farmers, pay hikes for civil servants and tax cuts from the Budget. There is also the likelihood of fiscal deficit soaring due to spending pressures.

The government has admitted that economic growth will slow to 8.8 percent in this fiscal year to 31 March 2008 from 9.6 percent last year, the first deceleration in three years. It is true that India’s economy is better insulated than many other Asian nations from the global slowdown because it is not heavily dependent on exports. Still it is not immune to the chill financial headwinds.

Economic growth is losing pace and inflation is on the rise, meaning India’s central bank — which has hiked interest rates nine times since 2004 to tame prices — has little room to loosen monetary policy to spur activity.

India’s sheen of strong growth and low inflation in India is starting to give way to one of slowing growth and rising inflation. On 07 March, inflation in Asia’s third-largest economy hit a nearly 10-month high of 5.02 percent, pushing through the central bank’s ceiling of 5 percent for this fiscal.

The 25 percent slide of India’s benchmark Sensex share index since 10 January and its 47 percent jump in year 2007 made it one of the world’s top performers. The slide is seen as the side effect of a changing global economic scene.