Saturday, February 27, 2010

Budget 2010-11 : First impressions

Pranabda is skillful in presentation of budgets. It is not surprising that his 2010-11 budget has won kudos from various quarters. Unavoidably, the brickbats from the opposition parties have been sharp and vociferous. Widening of income tax slabs and consequent reduction in IT for "the middle class" was an unexpected gift. However there are some worrisome factors which cloud the initial euphoria.

Much of the fiscal deficit arises from revenue deficit. Revenue deficit is budgeted at 73% of total fiscal deficit for 2010-11.Government borrowings therefore will be utilised mainly for revenue expenditure. This means that "borrowings" will not produce further wealth. This tendency leads to spiral borrowings to repay past debt.

Proportion of gross domestic debt to gross national product is a figure that is receiving attention from economists in various economies because of evolving crisis of possible sovereign default in Greece. Finance minister has stated that as part of the fiscal consolidation process, the government would target an explicit reduction in its domestic public debt to GDP ratio. Instead of sharing the present ratio with the budget listeners, he has only expressed his intention to to bring out within six months a status paper giving a detailed analysis of the situation and a road map for curtailing the overall public debt. At present, we can only hope that this ratio is not in the anxiety-causing range of 90% plus. American economists Carmen Reinhart and Kenneth Rogoff have spotted evidence that once a country's debt to GDP ratio crosses 90%, growth declines by atleast 1% a year.

Another negative of the budget is that tax rate reductions have occurred predominantly in direct taxes and hikes in indirect taxes. By definition, this is regressive. This does not do justice to the aam aadmi.

The budget also opens the gates for entry of more private sector players and the dreaded NBFC into banking. This is fraught with avoidable risk. The Finance Minister should not have forgotten the Global Trust Bank experience so soon.

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