Tuesday, July 7, 2009

Pranab Mukherjee’s budget for FY2009/10

The Indian Finance Minister Pranab Mukherjee presented fiscal budget for this year. It focuses on generating GDP growth rate of 9%, investing in infrastructure projects, and social welfare (inclusive development). More here and here. It is of Rs 10 trillion, India’s biggest-ever budget.

It is, not surprisingly, a continuation of the Congress party-led government's left-of-centre, pro-poor and populist policies.

There will be a sharp rise in deficit financing to pay for welfare schemes such as the landmark jobs-for-work programme - which has seen a near 150% rise - in the villages and social security schemes for unorganised workers.

So the bulk of the money to fund all this will come from printing currency and borrowing from India's central bank. There is also an implicit assumption that some money - nearly $10bn - will be raised by auctioning electromagnetic spectrum for telecommunications and divesting minority government holdings in state-run companies.

There are a few sops for the middle class though. Modest relief has been given to income tax payers, a small (only 3% of Indians pay income tax) but influential section of the country's middle class.

High on the list of policy priorities of the government is the enactment of a new food security law that envisages providing 25kg of rice and wheat each month at a subsidised rate of three rupees (or six cents) a kilo to each poor family. This was one of the pre-election promises made by the Congress.

More here. The budget is very much (and rightly) Keynesian.

"My primary objective right now is to come back to high growth rate. My target is to touch 7% GDP growth this year and take it to 8% to 9% thereafter," Mukherjee said. "If we are supported by a good monsoon this is more than possible," he added.

"When external trade is in bad shape and revenues are going down, I'm providing stimulus (through extra spending) to pull up growth domestically," he said. He added that between interim Budget and now, the government has increased spending by Rs 60,000 crore - Rs 40,000 crore by the Centre and Rs 20,000 crore by the states.

The FM said, "It will be a domestic demand generated growth. Since the contribution of direct tax to GDP is high, once demand revives and industry is back on a high growth path, we can expect higher revenue." He added, "I have spoken to all states and the industry and sought their contribution. With the help of the states we will be able to roll out GST, a major reforms in indirect taxes on schedule," he said.

The way Indian budget is being allocated will have an impact on the Nepalese budget, which is set to be unveiled later this month.