Status quo on tax rates in India's high-deficit interim budget

New Delhi: With no changes in tax rates but higher spending toward social sector projects, Minister for External Affairs Pranab Mukherjee Monday tabled a Rs.952,231 crore (Rs.9.52 trillion/$190.6 billion) interim budget for 2009-10 that chose to give fiscal prudence a miss during "extraordinary economic circumstances".
Presenting the interim budget on behalf of Prime Minister Manmohan Singh who is recovering from heart bypass surgery, Mukherjee devoted large parts of his 69-minute speech to the achievements of the United Progressive Alliance (UPA) government and said additional steps needed to be considered in the regular budget to be presented by the next government, after the ensuing general elections in a month or two.
He, however, made it clear that India's growth story remained intact and that the steps taken by his government had helped in cushioning the impact of global crisis on the country's economy. "In these difficult times, when most economies are struggling to stay afloat, a healthy 7.1 percent rate of gross domestic product (GDP) growth still makes India the second fastest growing economy in the world," he said.
"Extraordinary economic circumstances merit extraordinary measures. Now is the time for such measures," he said, as he presented the vote on account, seeking the parliament's approval for financing government expenditure till the regular budget is presented and passed.
As the result of enhanced spending on social sectors, towards schemes like rural employment guarantee scheme, higher education and mid-day meal programme for school-going children, the minister said the fiscal deficit would shoot up to 5.5 percent of the GDP.
He said in the current year, too, the fiscal deficit would climb to 6 percent, against the budgeted 2.5 percent, while revenue deficit would move up to 4.4 percent against 1 percent. Tax collections were also not helping either, he said, adding that there was a significant shortfall compared with budget estimates.
"Since the scope for revenue mobilization is bound to be limited in a period of economic slowdown, any increase in plan expenditure will increase the fiscal deficit."
The budget was not bereft of new schemes. Mukherjee unveiled the Indira Gandhi National Widow Pension Scheme and Indira Gandhi National Disability Pension Scheme for widows and disabled people in the age group 18-40 years.
The external affairs minister said crisis of the magnitude being faced by developed countries was bound to have an impact around the world, resulting in emerging markets also slowed down significantly.
"India too has been affected," he said, adding export growth dipped 17.1 percent in the first nine months, while industrial production fell 2 percent in December 2008.
Minutes after he presented the budget, Mukherjee was asked why he had decided to ignore tax measures to boost the economy. His reply was that the interim nature of the budget has placed constraints.
"That's why I have said that the regular budget needed to address the concerns," he said.
"Our government had done tremendously well and we didn't need a populist budget. We did not play to the gallery and followed the constitution to a T as required in an interim budget."