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Finance minister Pranab Mukherjee will be rewriting the budget from today. This became clear late in the afternoon yesterday when state elections results were declared and the Congress party was routed in three of the five states that went to polls.
By convention the budget is presented in Parliament in February end. But this year the government had decided to postpone it because of state elections. Though the Election Commission of India had given the go ahead for it after imposing a few conditions, the government opted to wait. It wanted to gauge the public mood and make the necessary course correction in the budget. The public mood is now known, and the budget may be up not just for a course correction. It may follow a new course altogether.
The third year budget of a government with a five-year tenure is usually reserved for unpopular fiscal decisions. After the poll debacle, the budget is likely to become an election budget. For this government, this year's budget is particularly critical. Lurching from one crisis to another for the past two- and-a-half years, it needs this budget to convey a loud public message so that it is not bogged down by policy paralysis. Also, after this budget there is a gap of 15 months without any major state election. Earlier, the government had hinted at cuts in spending, given the high fiscal deficit. Yesterday's election results have changed all this. But there is a rider: the government will not put all its populist decisions in this budget because the general elections are still two years away.
What do we expect from the budget now? According to senior officials of the finance ministry, the government has preponed its election budget from next year to this year. This means declaration of many rural development programmes. But, they add, it will also bring in sops for the middle class that is drifting away from the Congress. So how would the finance minister strike a balance between the rural and the middle class? It may be a situation where government imposes indirect taxes, like service tax, while offering personal rebates like tax benefits to the salaried. On the other hand, for the rural population it will be increased spending using the raise in tax collection.
Cuts in social welfare spending may not happen
In February, Mukherjee said he had sleepless nights due to the ever increasing subsidies. In all probability, subsidies for farmers will not be reduced but fertiliser and oil subsidies might be tweaked. “Farmers in Punjab and Uttar Pradesh need to be cultivated for the general elections in 2014. In 2009 they did not vote for the Congress,” says an official. In addition, there may be more indirect subsidies for them.
Keeping in mind the caste polarisation in Uttar Pradesh and Bihar (Congress's next target in its party revival strategy), there might well be some packages for the extremely poor sections categorised by Bihar chief minister Nitish Kumar as mahadalits. The Food Security Bill will be pursued vigorously now. Budgetary support for MGNREGA will not be cut new. It was expected earlier that the government will cut funds for MGNREGA and use unspent money from the non-collapsable fund. Officials say that may not happen new. “But there may be a decision to declare key rural incentives outside the purview of the budget,” says one official. It has been a trend to declare major economic decisions outside the purview of budgetary process. So, the government may stagger its populist decisions over the next one or two years while retaining tight fiscal measures in the budget. The central government had declared a special package for weavers in the run to Uttar Pradesh elections. This will give government time to gauge money availability. One of the windfalls government is desperately waiting for is the re-auction of the 2G spectrum and auction of the 4G one. This will provide adequate financial cover for its social programmes.