FM’s Sleight of Hand

In sum, the finance minister’s speech intends to conceal more than it reveals — in fact, it cheats. He has trusted in the propensity of instant commentators on TV to rely on ornamented words in the budget speech, and won the day against the experts and the market!

By S Gurumurthy, Indian Express 27/2/2010

The finance minister has done a fantastic job”. “Very good budget”. “See the positives”. “Fiscal deficit controlled to 5.5 per cent”. “Government borrowings reduced to just Rs 3.45 lakh crores”. “Roadmap laid for oil sector reform”. “Infrastructure boosted”. “Consumer demand to rise on tax cuts”. “Bonanza for the Middle Class”. “An Inclusive budget”. “10 on 10 for the budget”. Thus went the comments on the budget as this column was being written after a strenuous effort to browse online the hundreds of pages of budget papers to see what the Union finance minister’s speech left unsaid. But those who eulogised the budget and the finance minister had nothing other than what he had claimed in his speech and none of them would have had even a cursory glance at the budget papers which were put on the NIC website almost an hour after the speech.

Thanks to the experts’ euphoria, the BSE sensex rose by 400. But as the facts in the budget documents were slowly becoming known, the sensex moderated to a gain of 175 at close. But the finance minister had won approval with his well-structured speech which was long on words, including quotes from Kautilya, and well short on numbers. By now, taking his words as Gospel, the opinion of ‘Elite India’ has been sealed in favour of the budget. Of course, the ‘Other India’ has no instant opinion to express; already reeling under high inflation, against which there is no measure in the finance minister’s speech, it has only to experience in the days to come what the budget actually does. Now let us look at what the facts and numbers that lay deeply buried in the budget documents disclose.

Examine the claim that it is an inclusive budget. The additional provision for rural development is just Rs 3,936 cr, to a total Rs 66,137 cr for the coming year. This is a rise of 6.3 per cent. The estimated rise in the GDP for the coming year is 12.5 per cent. It means that the rural sector does not even get half of the rise in the prosperity of the country. The rise in the NREGS is just 2.5 per cent. Contrast this with the rise of 146 per cent in NREGS for 2009-’10 over 2008-’09. The tax cut for the middle class is some five times the extra rural development provision. Still the budget is claimed as an aam aadmi budget! Move on. The additional provision for agriculture is a pittance — just Rs 900 cr. So much for the finance minister’s claim of inclusive growth. So, what was an inclusive agenda in the budgets from 2004 till last year seems to have become a mere slogan. And this was the only finance minister who said he couldn’t care less about what the stock market felt.

Now look at the FM’s sleight of hand in his claims on infrastructure. See the provision for the road sector. It is just an additional Rs 2374 cr — just 13 per cent rise in the coming year, against 23 per cent rise in the current year over the previous. The additional provision for railways is Rs 950 cr — a mere rise of six per cent for the coming year against the rise of 46.3 per cent in the current year over the previous year. In 2009-’10 the additional provision in the urban infrastructure was 87 per cent. More. The finance minister had claimed in the 2009-’10 budget that IIFCL, the infrastructure finance set-up, along with banks was in a position to support infrastructure projects of Rs 1,00,000 cr! Against that claim, he admits in his speech now that the disbursement and refinance by IIFCL so far has been just Rs 12,000 cr. It will rise to Rs 25,000 crore in the next three years! How did the finance minister dare to say one thing in his previous speech and another thing now? He was confident that the experts who would give instant opinion would hardly have time to check what he had claimed some eight months back. The claim by the finance minister that the infrastructure provision of Rs 1,72,552 cr is 40 per cent of the plan allocation is less than honest. Acting cleverly, he does not give comparative figures for the current year. Indeed, there was no appreciable improvement in the coming year over the current year and yet the experts continued to eulogise the infrastructure boost in the budget.

What then is the secret of the reduction in deficit? The finance minister simply refused to spend this year. And that is perhaps correct. But he has concealed that and said something to the contrary. The income will increase in 2010-’11 but the expenditure will not. The increase in the non-plan expenditure in 2009-’10 over 2008-’09 was 37 per cent; in 2010-’11 over 2009-’10 is just six per cent. The non-plan expenditure was Rs 6,42,000 cr in 2009-’10, and in the coming year it will be just Rs 6,44,000 cr. That is, there will be no increase at all. If the finance minister had increased non-plan expenditure for 2010-’11 in proportion to the estimated GDP rise of 12.5 per cent, the deficit would have risen by Rs 1,99,000 cr to Rs 5,80,000 cr plus. It would have meant that the deficit would have been up by almost 2.9 per cent to some 8.4 per cent! If this had happened would the experts have gone gaga over the budget? Would the stock market have gone crazy? Obviously not.

See how faulty the comment is that the budget puts extra money in the consumers’ hands. Non-plan expenditure is a straight injection of money into the system. If that does not grow next year as it did in the previous how will the consumer get extra money? The finance minister’s claim that he had cut taxes to put extra cash into the consumer’s pocket is less than honest as the amount in the consumer’s hands will be actually less by Rs 1,80,000 cr as compared to the last year! His claim that he was putting money into the hands of the people through tax cuts is only one side of the story. The other side of the story, concealed in this budget, is the cut in non-plan expenditure. See more. The biggest component of the rise in non-plan expenditure in the current year was the Pay Commission dues, which was extra money into the pockets of the people to spend. That was the reason why, despite the downturn in the economy in 2009-’10, private consumption, which was expected to fall according to the Economic Survey 2008-’09, did not. Private consumption powered by the Pay Commission dues sustained GDP growth and was the secret of the growth in 2009-’10. This factor is absent in 2010-’11. How will the aggregate demand rise more than last year when the amount of additional money in the hands of the people is less in the coming year? So the claim that the tax cut will put huge money in consumers’ hands and activate domestic demand is less than honest.

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