Budget 2012: A tale of dire times, broken promises & more   2 comments

The ignorance and corruption of our ministers, where can you miss of instances? If you survey the court, if you survey the country, if the church, if the city be examined, if you observe the bar, if the bench, if the ports, if the shipping, if the land, if the seas…all these will render you variety of proofs; and that in such measure and proportion as shows the greatness of our disease to be such that, if there be not some speedy application for remedy, our case is almost desperate.

– Sir John Eliot on England in 1628.

The state of the Indian union is probably approaching that desperation now. Never in the past two decades has the economic situation been so grim, not even during the global credit crisis in 2008.

Industrialists, investors and the commoners were expecting remedy in the Budget, but hardly anything came by that promises better days, at least in the near future.
Industrialists were disappointed and investors did not believe the numbers that finance minister Pranab Mukherjee presented. It is the track record of failed promises that’s causing the gloom.

We  capture nearly a decade of promise versus performance and it is not rosy. Indeed, Mukherjee himself summed up the reality when he told Parliament: “I know that mere words are not enough.”

His realisation that credible proposals are the need of the hour did not translate into action, pushing many to conclude that it may be yet another year of missed targets. Policy flip-flops have been many, but this Budget added yet another dimension to it by amending the Income Tax Act with retrospective effect.

“There is nothing in this Budget that’s going to make people believe that India is now on a more credible long-term fiscal path,” said Jim O’Neill, chairman of Goldman Sachs Asset Management. “Some of the concerns and risks that many people would have had before the Budget, stay in place.”

The government enjoyed the benefit of doubt for many years. But its consistent missing of target is beginning to make investors fret. It spent more than budgeted in fiscal 2012, it doled out more in subsidies than estimated, it borrowed more, and raised less through disinvestment.

Prime Minister Manmohan Singh’s government has been long on promises, but short on delivery – be it fiscal reforms, or investment limit enhancement. Policy making has come to a standstill with businesses unwilling to take up new projects. But it keeps planning programmes that can wreck state finances.

“I doubt they can achieve the fiscal-deficit target,” said Robert Prior-Wandesforde, director of Asian economics at Credit Suisse. “We know from history that the government always overspends relative to its targets.”

Investments by global investors and the entrepreneurship of businessmen were the two pillars of the Indian economy for nearly two decades. Suddenly, that too is turning shaky.

If the government begins to deliver on the promises made it can help the economy take a giant stride. If fiscal 2013 turns out to be yet another year of unfulfilled promises, then it may be a long grind for businesses, investors and citizens.

Estimated Tax Receipts Versus Collections 

Tax revenue estimates, like most other parameters, often go awry. However, over the years, the gap between the estimates and the actuals has narrowed significantly.

One notable trend is that tax revenue tends to exceed estimates during the years when the economy has done well. While they tend to be below budget estimates in years of slower economic growth.

Budgeted Government Borrowing and Actual 

Historically, the government seldom stuck to its borrowing targets.

But this gap was sought to be curtailed in the initial years of the enactment of the Fiscal Deficit and FRBM Act in 2003.

Immediately after the Act was passed, actual borrowing was lower than the estimates.

However, it started overshooting estimates after the financial crisis of 2008. But this gap was sought to be curtailed in the initial years of the enactment of the Fiscal Deficit and FRBM Act in 2003.

Immediately after the Act was passed, actual borrowing was lower than the estimates.

However, it started overshooting estimates after the financial crisis of 2008.

Projected Fiscal Deficit to GDP and Actual Deficit

Successive governments have been profligate. But they got serious about controlling deficit after the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, which sought to restrict fiscal deficit to 3% of GDP.

For a few years, there was some reduction in deficit. But it again slipped after a massive dose of stimulus, following the financial crisis in late 2008.

Revenue Foregone Versus Subsidies

The government may have raised tax rates, but there are many economic activities that go untaxed due to various exemptions, which is revenue forgone. If some of these activities are taxed, justifiable subsidies could be met. Many of the tax incentives and exemptions have outlived their purpose and most benefits go to large companies that don’t deserve them.

Many reforms have been in discussion for years now. But the govt takes one step forward and then two steps back

Mumbai as Int’l Fin Hub, Anyone?

In 2007, the then finance minister P Chidambaram in his Budget speech said that the country’s financial capital has the potential to be a global financial centre. As is the governmental practice, he also set up a committee headed by World Bank economist Percy S Mistry.

Within just two months, in April 2007, the committee made a host of recommendations with alacrity to enable Mumbai join the league of London and New York, while Dubai was slowly becoming Asia’s financial capital with the advantage of surplus oil money from other Gulf states pouring in.

It proposed migration to full capital account convertibility, preparation of an exit strategy by the government for withdrawing from ownership of financial firms, gradual reduction of equity stake in public sector banks, establishment of a robust derivatives market along with a currency spot market.

It also recommended opening up of the Indian capital market to hedge funds and alternative investment vehicles, while removing all impediments to outsourcing of asset management by banks, insurance companies, mutual funds, pension funds and foreign institutional investors. Four years later, no one is talking about it as Mumbai’s infrastructure is bursting at the seams.

Of course, the sign of things to come was apparent at one of the functions to debate on the topic. When Rakesh Mohan, the then RBI deputy governor, got up to speak on the topic, the sound system fell silent. In desperation, he asked: “Can this city become one?”

Tripped by Crisis, FRBM Yet to Recover

Running huge fiscal deficits was a ‘given’ in the days of Licence Raj. However, the need to improve the fiscal health of the economy started getting serious policy attention only after liberalisation and structural reforms, post 1991.

After several years of deliberation and debate by policy makers, the Fiscal Responsibility and Budget Management Act, or FRBM, was passed in 2003. The Act, among other things, sought to restrict fiscal deficit to 3% of GDP by focusing on revenue raising measures and expenditure reforms. Besides, revenue deficit was also sought to be eliminated.

The government was serious and was successful in consolidating its finances for a few years and also in achieving the targets stipulated in the Act. The Act was also adopted by various state governments and many of them had succeeded in fiscal consolidation.

However, after the global financial crisis of 2008, things started going off the mark as the government had to resort to massive stimulus to revive the economy, which was badly affected by the global financial meltdown in 2008. Almost four years after the stimulus, even as the central bank has unwound monetary stimulus, there has been little success in unwinding the fiscal stimulus completely.

The finance minister has proposed to introduce amendments to the FRBM Act as part of Finance Bill, 2012. However, given that 2013-14 is going to be a crucial year from the political perspective, with general elections due in 2014, its success may not be certain.

Bill to Amend Banking Act Hangs Fire

The amendment to Banking Regulations Act, which at that time was touted as a game changer, was proposed seven years ago, but is yet to see the light of the day.

Soon after the Bill was introduced in Parliament, the House was dissolved. The key proposal in the bill was to change the voting rights equivalent to that of the proportion of shares held by an individual. Voting rights are now capped at 10% per shareholder even though the holding is larger. This was to be the carrot for international investors and for strategic investors.

When the bill was re-introduced after the elections to the new Parliament, it was referred to the standing committee for review.

The Opposition and the Left objected to the amendments on removing the cap on voting rights on the grounds that banking is a sensitive business and it should be tightly regulated.

The finance minister has again promised to table the bill before Parliament, but this time he may face resistance not only from Opposition parties, but also from allies, who stall new measures. The bill also empowers the Reserve Bank of India to supersede the board of banks and has an enabling provision that no individual or an entity can acquire stake in a bank above 5% without their approval.

As of now, the Reserve Bank of India exercises these options under its power to issue direction, but not under the legal framework.

Public Debt Office Debate Continues

Separation of the public debt office from monetary management is being debated at policy level since as early as 1997, during which five finance ministers and three RBI governors have been at the helm. A working group on separation of debt management from monetary management submitted its report to the Reserve Bank of India in December 1997.

It had then recommended, the separation of the two functions and establishment of a company under the Indian Companies Act to take over the debt management function.

The issue was further revisited in 2001, when the finance ministry came out with a report of the internal expert group on the need for a middle office for public debt management. Subsequently, the issue was revisited again in 2004 by another finance ministry committee.

Things moved a little with finance minister P Chidambaram announcing the government’s intention to set up separate debt management office in his Budget speech of 2007.

Two finance ministry committees touched upon the subject subsequently. Besides, in 2008, another working group on debt management was set up to study the pros and cons of setting up a national treasury management agency, which again did not come out with any specific recommendations.

But it’s been four years since the proposals have gathered dust, with no policy level talk since 2007.


Posted March 21, 2012 by avinash2060 in Economy

2 responses to “Budget 2012: A tale of dire times, broken promises & more

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  2. Pingback: Key Features of Budget 2012-2013 | articles4friends

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