Opinion The second-worst budget ever

The second expectation was that on expenditure,specifically subsidy expenditure,and specifically the subsidy on diesel,Mukherjee would announce not an immediate overhaul,but a planned phase-out of diesel subsidies. He did not tackle that problem,though the belief among eternal optimists (and I withdraw from that category,especially when it comes to any expectations from any member of the Congress party) is that he might do so in the weeks,months,and years ahead. Have eight long years not been enough for expectations to be fulfilled,for promises to be executed? No,the FM had nothing concrete to offer on this score. Essentially,his attitude was “what we did yesterday,we will do tomorrow”. Anybody who has had a chance to vote for or against the Congress since 2009 has been compelled to vote against. Worth doing the research,but unlikely that there is any sequence in India’s democratic history where the sitting Central government has been able to lose so emphatically as the Congress has lost in two large and important states — Bihar in 2010 and UP in 2012.

The third expectation was that the FM would take the chance to raise excise,service,and custom tax rates to the 2007 levels of 12 per cent from the great financial crisis-reduced levels of 10 per cent. And balance this tax hike with an acceptance of the new tax structure (a tax rate decline) proposed in the Direct Tax Code (DTC). Mukherjee more or less did the former — he raised excise and service tax rates,but only tinkered with the recommendations of the DTC.

The net result of Budget 2012-13 is that the Congress party,and its executioners,have been able to decrease the fiscal deficit to 5.1 per cent of GDP from 5.9 per cent in 2011-12. If this was genuine fiscal consolidation,it would be a great success story. But about two-thirds of this reduction has nothing to do with fiscal responsibility — about 0.6 of the 0.8 percentage points reduction has to do with sales of 2G and 4G auctions and some disinvestment! It tells you about the bankruptcy of expectations that well-meaning people think that this trivial fiscal consolidation is a significant step forward.

If all of this did not make a budget bad,consider the arrogantly stupid,and stupid beyond compare,policy. In Section F of the Finance Bill,2012,Rationalisation of International Taxation Provisions,the following policy statement is made: “Certain judicial pronouncements have created doubts …” (read the Vodafone case). The new policy is not only that the whole Vodafone victory against the Indian tax authorities is nullified,but that any similar cases can be reconsidered with retrospective effect from 50 years ago! If this is not 1984,I would like to know what qualifies for that infamy. Note that the objection is not whether a new law is needed,which disallows the Vodafone kind of activity. Indeed,a new law might be eminently desirable. What brings intelligence into question is the retrospective nature of this policy. Many of us do not read,or even know about,such details. Credit for breaking this story has to be given to NDTV Profit,where the story first broke.

In conclusion,let there be no mistake. The budget and Mukherjee have not lived up to expectations. Indeed,it is likely that the finance minister will now find his political ability,his master tactician image and economic sagacity to be brought into open question. He might have made himself the first casualty of this budget. It is fair to say that adding up everything,and especially the Vodafone insertion and the obnoxious challenge to the Supreme Court,that Budget 2012 has got to be one of the worst,change that to the second- worst,budget in Indian history. It is,though,a reasonable challenge to the 1970-71 Indira Gandhi budget that boldly went where no politician,economist,socialist or communist had ever gone before,or since — the recommendation that the highest marginal income tax rate be 97 per cent!

In the end,I must apologise — mea culpa. I have been consistently arguing that since the Congress had been consistently doing the wrong thing,the law of averages would mean that they would at least begin to do the right thing. Especially since having lost a lot of political capital,and an even greater loss in credibility,the party would have a “nothing to lose” attitude. I could not have been more wrong. Nothing to lose does not incorporate suicidal tendencies.

In an article published two days ago,I had written that the prime minister,Manmohan Singh,had got a second chance to make history. He had helped bring in the 1991 economic reforms,for which the country has been grateful. But he has also presided over now nine consecutive budgets — each budget has raised the prospects of the introduction of second-generation reforms. He has failed each time. It has been a disappointing and sad tenure. It has been a long goodbye,but it must be time for him to finally resign. If he has stayed on under the impression that après moi,le deluge ,then he must see that disaster has struck the Indian economy,and he has been able to do precious little about it. Maybe he has even caused it? Time for the PM to go — mid-term polls,anyone?

The writer is chairman of Oxus Investments,an emerging market advisory firm