Nepal: The Indian Budget 2012-13, Hopelessly Status Quoist

Madhukar SJB Rana

Professor, South Asian Institute of Management

Background

  • GDP grew 6.9% in 2011; target 7.6% (+/- 0.25) in 2013 and 8.4% in 2014
  • Total Expenditure: Rs 14,90,925 crores ; Govt sees expenditure rising 29% in 2012-13
  • Total Revenue:  Rs 10,77,612 crores ; growth of 15.6% from 2011-12
  • Current account deficit in 2011/12 seen at 3.6 pct of GDP
  • Fiscal Deficit: 5,1% in 2012-13 as compared to 5.9% in 2011-12.

Foreground

It’s a classical case of the French saying  ‘le plus ca chang e le plus c’est le meme chose’.

Politically, this Budget ensures the survival of the UPA 2 in 2011. He is acutely aware of the political fall out of the inflation in 2011-12 and so is hell bent on keeping inflation in check as a survival priority this financial year.  However, the global oil price is a real threat. Friendly relations with Iran, benefitted by barter-like  trade in Rupees, as payment, will provide the needed cushion for political risk management. He is also aware of the need to control inflation arising from the supply side.

Finance Minister Pranab Mukherjee’s Budget 2012-13 is premised on the strategic assumption that the global environment is risky where the EU is in recession; the USA and Japan have modest growth now; but they are not free from the threats of a double dip recession; oil prices may shoot up to around $115 per barrel. And, therefore, India’s has to be self reliant to grow the economy. Self reliant, by generating  Consumption and Investment internally.

He envisions all this to happen with more Disposable Income in the hands of the middle class as well as more Infrastructure Investment by the private and public sectors in developing the urban environment generally and specifically the modernization of the All India land, air and sea connectivity. 8,800-km of highways to be developed under National Highway Development Project in 2012-13. Govt to double tax free bonds for infrastructure financing to Rs 60,000 crore.

Hence he has reduced income taxes for all slabs and (surprisingly for a socialist) stopped at a maximum marginal rate of 30% more those earning Rs 10 lakhs and more . Those earning less than Rs 2 lakhs need pay nothing; Rs 2-5 lakhs  pay 10%; Rs 5-10 lakhs pay 20%. Savings bank account interest up to Rs. 10,000 exempted from tax.

On the Investment side Rs. 15,888 crore to be provided for capitalisation of public sector banks and financial institutions. Tax free bonds of Rs. 60,000 crore to be allowed for financial infrastructure projects.

Capital boost to financial and infrastructure sectors: Rs. 15,888 crore to be provided for capitalisation of public sector banks and financial institutions; Infrastructure investment of Rs. 50 lakh crore in 12th period, with half from private sector; Tax free bonds of Rs. 60,000 crore to be allowed for financial infrastructure projects.

There will be tax relief for stressed sectors like agriculture, infrastructure, mining, railways, roads, civil aviation, manufacturing, health and nutrition, and environment. 

To attract foreign funds efforts on to allow FDI in multi-brand retail and permitting foreign airlines invest in domestic players; external borrowings to the extent of USD one billion for aviation companies allowed.

Conclusions:

One must confess that it was hard to keep awake while Pranab Mukherjee was reading his  lack lustre budget. It was devoid of any hype other than underscoring that commonplace cliché that he seeks ‘Growth With Stability’. Which Finance Minister does not?

Frankly, Pranab Mukherjee is not known for boldness or innovations in budget making Nor a person with charisma in budget delivery. He is more a master politician than an economist:   well known for not hyping or raising expectations. He definitely had a tight rope to walk on and he has succeeded admirably by keeping the coalition united and in power. 

Politically, this Budget is symptomatic of a weak Indian government; unable to usher the necessary economic and administrative reforms-- without which the magical 10% sustained growth in GDP will just not happen.

A foremost objective of his Budget is Fiscal Consolidation. Well we do not see any in 2012 as the fiscal deficit will be above the optimal mark of 4.9%. We and are now told that it will be drawn out over 2013 (and 2014); when the Fiscal Deficit will be brought down to 5.1% from 5.9% in 2012. Neither is the deficit down: nor the Tax Revenue: GDP ratio up, which are the two indicators for effective fiscal consolidation. One needs to underline that subsidies is 2% of  GDP in 2011.

Fiscal Consolidation must also be measured by the extent to which the Market rather than Babudom is the decision taker in the economic life of a nation. Alas, this Budget empowers the bureaucrats even more discretionary powers especially in tax administration where they have been given the right to write back dues etc. that may go as far as 16  years if they choose to! Yes, we are indicate that the ICT intervention will improve targeting and delivery in the Public Distribution System as well as the delivery of subsidies But this remains to be seen as ICT also depends on the public servants  who are as mired in graft and corruption as are  the politicians.

To say that political compulsions held back any hope of reforms is to not be cognizant of the fact that he is a old style socialist yet driven by Nehruvian socialism. Ironically, this Budget will increase the inequities amongst the income classes where the poor pay proportionately more in taxes than the poor. Also, it is totally silent on employment issues when what India has been witnessing is growth without employment. To be fair, there are tax concessions for various educational interventions by the private sector and also provision for concessionary educational loans.

, there is Rs 30,000 of disinvestment to take effect. But more disinvestment would have allowed any possibility of crowding out by the public sector. Perhaps the socialism in him (and his Chairperson) prevents further disinvestment and privatization.

What is conspicuous by its absence is his not telling us precisely how he is going to cut the fiscal deficit?  After all, he has not cut back on subsidies. Nor has he raised corporate taxes Or made income taxes more progressive on the ultra rich—those earning way beyond Rs 10 lakhs per annum, for instance.  Perhaps he has a Money Laundering Game Plan when he will be able to recoup the assets lost in the black economy in India: Or to the offshore banks in Switzerland, Luxemburg and Mauritius.

It may be pointed out here that his placing 4% customs duty on gold imports will make it attractive for Nepalese politicians and business houses to, once more, smuggle gold into India-- as happened in 2008 when PM Baburam Bhattarai was the Finance Minister.

Lastly but not the least, the Budget is heavily dependent on India’s ability to attract FDI in all sectors including retail. However, the policy decision to allow retroactive collection of taxes through a new law will send shivers down the spines of the MNCs and TNCs (e.g. Vodaphone case will have far reaching impact on FDI coupled with the fallout of the 2 G scam).

(The author is a Former Finance Ministerof Nepal)

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Comments

  • Posted on - 2012-03-19    by     shyam
  • Enjoying immensely the diverse reaction to former Finance Minster of Nepal's commentary on India's budget 2012-13. He calls for radical reforms to have a 9-10% sustained inclusive growth. But is this radical reform ever possible given the vested interest involved to preserve the status quo as far as possible? May be Prof Madhukar should consider the other options as suggested by Anna Hzare and Baba Ram Dev. Finally, would have like to see how the Indian budget will impact the region as it is going to give huge sums of aid as well as duty free access to exports from Bangladesh, Bhutan and Nepal
  • Posted on - 2012-03-19    by     David in London
  • Delighted to read Prof Rana's views on FM Mukherjee and his Budget. It is pathetic that a person as brilliant as Dr Pranab Mukherjee should be reduced to this level by the monkey on his back, so to speak. He is no other than Rahul Gandhi who swears by subsidies to keep his dynasty going. Including the patronage of the entire bureaucracy that shares in the leakages with proverbial graft and corruption. Dr Mukherjee is a PhD in economics who served as VP in the World Bank and also as Finance Secretary, like PM Manmohan Singh. When he said once publicly, that he would dearly miss the daily critical advice from Sonia Gandhi when she took off to the US for her surgery this, to me, personified how feudal Dr Mukherjee;s mindset had been reduced to. Pranab Mukherjee,who in 2008 was declared Asia's Best Finance Minister, is doing the rounds currently to say (pathetically) that, like PM Singh, India will have to "bite the bullet" to sustain high growth of 9-10% per annum from 2014 on wards. He knows he missed his boat to be a great Finance Minister by being victim of dynastic politics riddled in black money and offshore parking of billions of dollars by the Family. I suspect that India's economy will face stagflation at around 6-6.5% GDP growth per year for 4-5 yrs until it get to curtain the deficits all round -- revenue ( 4.4% in 2012); fiscal (5.9% in 2012) and primary (2.8% in 2012). I do not agree with Prof Rana that the optimal fiscal deficit is 4.9%--more like 3% in my judgement. With this kind of anticipated growth one may safely expect humongous internal security challenges as growth and development will be even more inequitable and non inclusive than ever before with vast divides between the rural and urban areas and the the poor and ultra rich. Dr Mukherjee quoted from Shakespeare's Hamlet to the effect that "I have to be mean to be kind" while unleashing his tax proposals. He expects that this will unleash growth in the long run by mopping up revenue to control the deficits. Poor soul, he has actually been men to be even more mean as unless he downsizes the government's commanding heights with radical economic, legal, financial, administrative and labour reforms the envisaged 9-10% sustained GDP growth will remain a sad mirage for all Indian.
  • Posted on - 2012-03-17    by     Laxman Lamichhane
  • Dear Madhukar Sir, Thanks for your nice article with fair analysis of Indian Budget 2012-13 which has direct and indirect impact on Nepalese economy also. It guides Nepali policy makers in setting the issues of priority and necessary scrutiny on their part. Thanks
  • Posted on - 2012-03-17    by     subir
  • Interesting assessment by SAIM's Prof Madhukar Rana. I have reviewed many Indian papers and almost all agree with the tenor of Prof Rana's conclusion and headline. Good to see India through Nepali eyes. I wish he would also enlighten us with what it means for Nepal's economy in 2012-13 as we are so interlinked. True, he points out that gold smuggling will soar. Let's not be surprised with this prediction as the Maobdi want money for the forthcoming general elections and also to pay their PLA cadres recruited into the YCL.
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