Opportunities go abegging

OK, first a short vent on the budget before getting back to WAC.

The budget was all that I expected it to be, and all that I feared it would be. Reforms have been more or less stalled. The economy has grown at an average of 8% over three years, yet the fiscal deficit has barely budged from 4.5% in FY04 to 4.1% in FY06. What will happen if the monsoon fails this year and growth falls back to the 5-6% bracket? Or if the world economy takes a beating and our external trade suffers correspondingly? This was a chance to press ahead with fiscal austerity and we should have done much better than targeting a fiscal deficit of 3.8% and a revenue deficit of 2.1%.

No major policy reforms either. That's probably in line with the attempted dehyping of budget day so that policy making becomes independent of annual budgeting. But with elections in Assam, Kerala, WB and Tamilnadu in April and May, don't expect anything on that front pre-monsoon. Labour reforms, pension reforms, FDI in mining and retail, restructring of the power policy and infrastructure development all require urgent action. The UPA is in no hurry though.

One happy omission was an announcement of the creation of the 6th Pay Commission. Since the PM has announced its inevitability, it's a question of when, not if. But hopefully the government will adopt a leisurely pace on this issue too and defer the Commission to next year.

Status quo on taxes, save for the small cut in peak customs duties and the slight rise in service tax. Umbrellas have been brought under the ambit of excise duties, and understandably my Dad is not too happy. But as with the introduction of the VAT, my stance is that personal inconvenience is not too big a price to pay for more equitable and consistent policies. Various exemptions on different taxes will cost the exchequer about 1,50,000 crore in lost taxes next year, if I recall correctly. The elimination of these exemptions and a simplification of the tax code will be instrumental in boosting revenues without hurting growth.

Of course, there are the usual cribs about ballooning subsidies and wasteful expenditure in poverty-alleviation and social equilisation schemes. Par for the course though...I just hope that 2-3 years of 8%+ growth will enable fiscal consolidation to occur relatively painlessly. But to make policy with only the most optimistic scenario in mind is not something a WIMWIan would do, though about Harvard grads I have no comments!