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Mainstream, VOL L, No 25, June 9, 2012

Union Budget 2012 - 13 : A Spurious Budget

Monday 11 June 2012, by A V V S K Rao

‘From Birth to Death, our Lives are affected in countless ways by the Activities of Government.’
Stiglitz, Joseph E. (Nobel Laureate)


The Union Budget for 2012-13 aims at addressing two primary concerns—the economic slowdown and unsatisfactory state of government finances. However, the means it employs are so cautious, and even contradictory, that the chances of success appear remote.

The Finance Minister kept in the people’s pocket an estimated Rs 4500 crores by a net cut in direct taxes. But he robbed their pockets by almost Rs 46,000 crores by raising indirect taxes. It does not require a sage like Vasishtha or Vyasa to say that this will erode, not promote, domestic demand.

Major Contradiction in Macro-theoretical Proposition

IT is expected from the Budget that ‘inflation will be further lowered and saving levels increase’. However, there is a contradiction in this proposition.
As per the macro-economic theory, a rise in savings, a rise in savings, without a higher growth rate, implies lower demand and therefore consumption. If a Budget releases inflationary forces by a huge rise in indirect taxes (as in the case with the present Budget), it is the cost of goods rather than the real sale of them, that will rise—causing a fall in both consumption and savings. The hike in indirect taxes will result in price rise and reduced savings. And when prices rise, both savings and real consumption fall. This is what had happened in 2010-11 (as per the Economic Survey 2012).

Many economists feel that taxes on income and corporate profits are more egalitarian. They view that taxing individuals and corporates rather than production and trade would result in less stifling economic activity.

The unprecedented government borrowing of Rs 470,000 crores, projected for 2012-13, will dry up liquidity and raise interest rates. There is already a liquidity crunch with banks borrowing heavily from the Reserve Bank. If interest rates, already high, rise further, that will also force down consumption. When it is said consumption, here it includes housing loan, that is, demand for housing loans.
The Budget also erred in giving certain figures. For instance, the gross tax revenue as proportion of the GDP was 10.1 per cent in 2011-12 and is estimated to rise to 10.6 per cent in 2012-13. There is actually a fall in the gross tax to GDP ratio in the last two years. While the Budget puts the ratio of gross tax receipts to GDP at 10.6 per cent in 2012-13, it was over 12 per cent in 2006-07, 13 per cent in 2007-08 and 11.5 per cent in 2008-09. So the revenue in proportion to the GDP has actually fallen in the last three years.

Micro-Aspect or Specific Sector-wise Impacts

THE bulk of domestic consumers may have to pay higher tariff on power due to the combined effect of one percentage point rise in Central excise and a possible inclusion of transmission and distribution (T & D) in the service tax net. According to a State Government source, the cost of power may move up by 6 paise a unit.
The concession rates of excise duty of 1.03 per cent and 5.15 per cent have been increased to 2.06 per cent and 6.18 per cent respectively on many specified products. As a result, basic and necessary goods—such as tooth powder, spectacles/lenses, sewing machines, pens, pencils, sugar confectionaries, pastry, cakes, paper, drugs, medical equipment etc.—will now be costlier by 0.5 per cent to 0.7 per cent.

On imported bicycles, the basic customs duty has been raised from the existing 10 per cent to 30 per cent. Now a branded luxury bicycle costing Rs 15,000 will cost between Rs 17,000 and Rs 19,000.

The only silver-lining in the Budget proposals is that the textile sector has emerged as one of the biggest gainers from the Budget. The incentives include a proposal to set up mega clusters; a Rs 500 crore scheme for promotion and application of geo-textiles in the North-East; Rs 5000 crore Venture Fund with SIDBI to enhance the availability of equity to the MSME sector; and full exemption to automatic shuttle-less looms from five per cent basic customs duty to modernise the weaving sector.

Understated Fiscal Deficit

THE most alarming feature of the Budget is that the total fiscal deficit now stands at Rs 521,980 crores or 5.9 per cent of the GDP. Internationally, a three per cent fiscal deficit is considered healthy. This works out to over Rs 2.5 lakh crores given India’s current GDP. If taxes were honestly collected and unnecessary concessions phased out, and the resultant revenues were spent on creating necessary socio-economic infrastructure, physical infrastructure, and other productive programmes, the country could have generated huge additional employment in the past few years. The resultant growth of domestic demand would have kept India on a higher growth trajectory leading to the much needed inclusive growth pattern.

Again, the Budget understated the deficit figure because the full impact of the subsidy burden is not reflected in this figure. After a huge dose of higher taxation and the expectation that the growing economy will fetch higher collections, the Budget has accounted for a higher corporate taxation amounting to Rs 45,547 crores, a higher income tax of Rs 23,907 crores, a higher custom duty of Rs 33,964 crores, a higher Central excise of Rs 43,655 crores and a higher service tax of Rs 29,000 crores.

The impact of the higher indirect taxation would indeed be adverse on the Indian economy. The total expenditure for 2012-13 budgeted at Rs 14,90,925 crores. Coupled with higher indirect taxation, the huge expenditure is going to trigger inflationary forces. Despite beeping a heavy burden on the Indian public, the Budget pegs the fiscal deficit at 5.1 per cent on the unrealistic assumption that subsidies in the coming year would reduce. For this, the Budget trimmed the allocation for food, fuel and fertiliser subsidy to Rs 1.8 lakh crores for the coming year with an intention to keep subsidies below two per cent to the GDP so as to meet the 5.1 per cent fiscal deficit target. But past experience shows reckless spending limits are less the exception than the rule. Subsidy spending overshot by Rs 1.34 crores budgeted for last year by Rs 74,000 crores.

The infrastructure deficit has been widening year after year and is one of the main reasons holding back economic development. Therefore, in the latest Budget, it is proposed to award contracts to build 8800 km of roads in 2012-13. In a country like India expansion of infrastructure provides scope for the state and its agencies to act to some extent independent of interest groups. Rent-seeking is promoted by this and it causes cost and time overruns in infrastructure projects, as well as state functionaries extracting bribes and a reduced effectiveness of the infrastructure due to the poor quality.


SO far the UPA Government has given eight Budgets to the Indian people. If one takes the figures for the years 2004-2011, concessions by way of corporate income tax, excise duty and customs duty will add up to Rs 21,25,023 crores or close to half a trillion US dollars. This is more than 12 times the 2G spectrum losses.
According to Global Financial Integrity, it is equal to or bigger than the Rs 21 lakh crores siphoned out of India and illegally hoarded away in foreign banks since 1948 ($ 462 billion). Only this looting has taken place in seven years starting from May 2004-05. This is a mere mockery of parliamentary democracy.

The 2012-13 Budget was formulated keeping in view the 2014 general elections. There is no sound economic logic in it. In a nutshell, the Budgtet 2012-13 went back to the pre-1991 experiment of higher taxation and higher government expenditure, a step which may make the economy more sluggish and non-competitive. One has to remember, taxes are necessary, government expenditure is a must and proper allocations are desirable. However, they should be guided by sound economic logic. In the context of liberalisation the former two should be kept within acceptable limits, so that the growth forces can again be triggered. Budgeting should be aimed at achieving near optimal allocation of resources.

1. The Hindu, March 17, 2012.
2. Gurumurthy, S., The Hindu, March 19, 2012.
3. Sainath, P., “Corporate Socialism’s 2 G orgy”, The Hindu, March 7, 2011.
4. The Times of India, March 17, 2012.
5. D’Souza, Errol, “Budget 2006—Outlays, Inequality and Growth”, Economic and Political Weekly, March 11, 2006.

Prof A.V.V.S.K. Rao is a Senior Faculty member, Department of Economics, Osmania University, Hyderabad.

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