The Hindu Business Line : Continuity without fireworks

Given that Budgets will be delivered under ever increasing constraints, there will be greater continuity, stability and predictability of Budgets and that's as it should be. So the biggest missed opportunity of this year — is of not tinkering with any rates at all!

If we ignore the looming dark clouds of inflation under which the Budget was presented, we may be able to discern many positives. These positives are broad trends, not isolated silver linings.

First, the remarkable news is that direct tax collections have almost overtaken indirect taxes for the first time. For the past eight years the share of direct taxes in total tax collections has grown from around 30 per cent to about 50 per cent now.

This share is often taken as a sign of maturity of an economy, since indirect taxes are inherently inefficient or regressive, especially if they cascade.

Second, the demographic dividend is now a five-year trend. In the last six years, employment growth (2.5 per cent) has been faster than population growth (1.6 per cent), after lagging for almost half a decade earlier.

Third, is the rise of national savings rate — again a consequence of demography. Domestic savings are at 32.8 per cent, making much higher investment and growth possible.

The Finance Minister had these trends to his advantage, and perhaps that's why there were heightened expectations. But his choice of initiatives on the fiscal front were constrained by at least three other factors (apart from the inflation fighting imperative, about which Budgets can do precious little).

These were: (a) balancing pro-growth initiatives with social sector spending; (b) making agriculture the focus, since 9 per cent growth cannot be sustained for too long, unless we get the farm sector to grow at 4 percent; and (c) remaining within the limits of the fiscal responsibility law.

As a consequence, the Finance Minister was supposed to deliver by operating within a narrow range. And yet because of the high tide of 9 per cent growth, many observers expected him to announce big bang initiatives — such as opening the capital account, allowing pension and insurance funds greater access to capital market or increase FDI limits in some key sectors. But it is just as well that such announcements stay outside Budget speeches, and this Budget too lacked any fireworks.

This is especially so in a coalition setting. Remember, every government after 1984 has been a coalition of not always compatible partners.

The best news from the Budget is the fiscal performance, although a greater scrutiny and pruning of expenditure would have been welcome. The slippage of the revenue deficit is worrisome, and raises some doubts about next year's targets.

The increased funding to agriculture, health and education is to be seen as long-term investment, but nevertheless should be followed up by a report card in the much promised `outcome budget'.

Attention to such details as groundwater recharge, incentives for bio-diesel, a study on climate change, and direct fertiliser subsidy to farmers are all appropriate and welcome signals. The separation of the Public Debt Office from the Reserve Bank of India is also overdue.

One can quibble about the tinkering with the dividend distribution tax, or sneaking an excise policy change on cement, moving it from specific to ad valorem. It is not clear what objective is served by these measures.

Given that Budgets will be delivered under ever narrowing constraints, there will be increasing continuity, stability and predictability of Budgets and that's as it should be.

So the biggest missed opportunity of this year — is of not tinkering with any rates at all! That would really have sent a message of continuity and stability.

(The author is Chief Economist, Aditya Birla Group.)