What will Chidambaram do in Union Budget 2008?

Mr speaker, Sir, it is my privilege to present the budget for 2008-09.” It’s the same line that Finance Minister Palaniappan Chidambaram will use on February 29 to open his Budget speech, but what follows thereafter may not be as cheerful as the four previous Budget speeches he has delivered as the UPA government’s chief financial officer. For, in a matter of a few months, things have gone from rosy pink to a cautious grey, if not pitch black. That’s because the good times that made prosperity possible seem to be slacking off.

Even as the latest industrial production or excise collection numbers betray telltale signs of some slowdown in the country, the global economy, too, is showing signs of stress. The International Monetary Fund has cut the forecast for global economic growth from 4.4 per cent to 4.1 per cent this year. And the impact is being felt by both in software services exporters and manufactured goods exporters; while the former have started reining in hikes and headcount, the latter have had to shed jobs by the thousands. The culprit? A near 12 per cent appreciation in the rupee versus the dollar in 2007. Add to it the rising costs in the economy— right from the cost of food and fuel to the cost of money.

What makes the job even harder for Chidambaram is the fact that some 10 states are due for elections later this year, followed by general elections next year. Not surprisingly, there’s clamour all around him for sops—from his own coalition government and allies, who are keen to return to power next year as well; from industry, which fears rising inflation will push up costs of funds and soften consumer demand; from the aam aadmi, who wants tax breaks and cheaper goods in the face of rising prices. What the champions of sops will also cite to buttress their case is the surge in tax collections. Heady economic buoyancy, aided by a widening tax base, helped improve collections (see Cushy Coffers). Direct taxes as a percentage of GDP jumped from 4.2 in 2004-05 to 5.1 in 2006-07. In December ’07, perhaps for the first time ever, takings from direct taxes exceeded those from indirect taxes.

That has automatically increased expectation levels from the Budget (See Top 10 Expectations). A BT-Synovate survey of CEOs, fund managers and corporate executives across metros (see page 76) captures their high expectations. Prominent on the list of expectations is a relief on direct taxes, mainly in the form of increased exemptions, and the removal of surcharges. Says Adi Godrej, Chairman of the Godrej Group, who believes there is a bit of a demand slowdown at present: “The Budget is an ideal opportunity to provide a fiscal stimulus to the economy.
Reducing direct tax rates will spur the economy, if not add to the tax collections.” Godrej also thinks it is a good year to cut indirect taxes such as excise as well. And if one recalls the near consistent stance of the FM on taxes—enhanced compliance makes a case for moderation in taxes—then there is cause for hope and cheer. This Budget should be a significant one for indirect taxes, but more on that later.

For the aam aadmi

The pressure to deliver largesse may force Chidambaram to script an aam aadmi budget. That, in short, means loud announcements and enhanced outlays for agriculture, rural development, water-related programmes, education, health and other social schemes in line with the 11th Plan (2007-2012) targets. In the immediate term, that also means continued subsidies (see Subsidies: Necessary Evil?).

Siddhartha Roy, Economic Advisor to the Tata Group, expects capital expenditure in the rural sector, particularly agriculture, to be the top priority for the government as agriculture’s share in GDP capital formation has declined from 2.27 per cent in 1999-2000 to 1.9 per cent in 2005-06. “This trend needs to be reversed by giving tax breaks and other incentives needed for private investments in the agricultural sector and agro-business industries,” says Roy. However, the actual Budget proposals might well be more direct. “If not outright loan waivers, we might see some relief for indebted farmers. Banks with farm sector non-performing loans could also get some relief,” says Ajit Ranade, Chief Economist, A.V. Birla Group.

On health, the government has been talking of a National Urban Health Mission on the lines of the rural-centric programme. More details of the same could probably be fleshed out in the Budget. On education and skills development, there will be significant announcements with probably some handles on making sure that the states implement these schemes diligently.