Budget 2009-10: A Detailed Overview
It has to be admitted that the timing of the Union Budget 2009-10 is unique!
This budget has been presented in the midst of a global slowdown, at a time
when India is positioned in the midst of a recovery process. The growth rate
of India’s Gross Domestic Product (GDP), which prevailed at an average rate
of 9% plus for three continuous years preceding this, dropped to less than
7% during the year 2008-09. This has created widespread concern especially
because India has been targeting 9% plus growth in the short to medium
term, over the next decade or so. The government was thus largely expected
to address this issue in the budget in order to ensure that the economy veers
back to a path of aggressive growth.
Another major concern has been volatile inflation in the economy; inflation
based on the wholesale price index increased to a level over 12% during the
middle of 2008, but fell to a negative 1% during the early parts of the
current year 2009. Disparity in income between the rich and the population
‘below poverty line’ has been increasing, creating a major concern for quite
some time now. Another issue that the government wanted to address in this
budget was the anomaly in the overall composition of the nation’s GDP—
currently, the services sector contributes more than 50% to GDP, while
contributions from manufacturing and agriculture stand at less than 50%. A
vibrant services sector, predominantly driven by the Information Technology
sector has helped India in the last decade by strengthening its exports and
foreign currency position, but the lack of a robust manufacturing sector and
a suffering agricultural sector mean that growth does not percolate too deep
into the rural areas, contributing to inequitable development within the
country. Of course, agriculture is a vital component of the Indian economy
and an agricultural sector that contributes less than 20% to the overall GDP
is totally unacceptable. The government was keen to address this issue in
the budget 2009-10. Every year, the government initiates new schemes and
development programmes, allocating funds and resources to tackle many of
the above issues, but when it comes to implementation of these schemes,
the failure has been complete! Implementation and delivery mechanisms
therefore deserved the urgent attention of the government.
In the context of this backdrop, the finance minister put forth Budget 2009
with three primary objectives:
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Drive the economy at 9% plus growth rate for the short to medium term.
Bring about a framework of initiatives that would address the issue of
inclusive development, i.e., elevate the economic status of the people
below poverty line and reduce the economic gap.
Strengthen the delivery mechanisms of the government and create a
robust implementation mechanism.
Whether the government has been successful in meeting the above
objectives through the budget statement is what we shall explore here.
Initiatives to jump start the economy
Ever since the recession in the West was confirmed during the latter part of
2008, the government of India together with the Reserve Bank of India (RBI)
has been responding through various stimulus packages directed towards
increasing public expenditure, offering tax relief and easing liquidity in the
economy. It can be reasonably stated that these initiatives have been largely
successful because even as countries around the world were slipping into
negative GDP growth, India managed to restrict the impact of the slowdown
to a fall in its GDP growth from 9% to around 6.7%; that by itself could be
seen as an achievement. But for the three stimulus packages announced and
implemented by the government together with the RBI, the fall in the GDP
growth rate could have been much higher. However, such large scale public
spending and stimulus package comes at a cost! The fiscal deficit of the
country has increased from comfortable levels of less than 3% of GDP to
more than 6% of GDP, primarily due to these stimulus packages and other
schemes announced by the government.
Initiatives to develop infrastructure
More than Rs. 25000 crore has been allocated towards infrastructure
spending in addition to other support measures that have been announced.
Infrastructure development certainly was a fundamental agenda of the
current budget since it would be conducive towards both short term revival
and long term growth of the Indian economy. The following were the key
initiatives that were focused on increasing infrastructure development in the
economy.
There was minimal financing available for infrastructure projects in the
country. In order to clear this bottleneck, the current budget has directed the
Infrastructure Finance Company Limited (IIFCL) to evolve a ‘Takeout
financing’ scheme in consultation with banks to facilitate incremental lending
to the infrastructure sector. IIFCL will refinance 60% of commercial bank
loans for Public Private Partnership (PPP) projects in critical sectors over the
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next fifteen to eighteen months. IIFCL and Banks are now in a position to
support projects involving a total investment of Rs.100000 crore.
One of the major programs that received higher Budget allocation was the
National Highways Development Programme (NHDP), in which budgetary
support to National Highways Authority of India (NHAI) was increased by
23% to Rs 8578.45 crore over Rs 6972.47 crore in 2008-09. Towards
improved road infrastructure in the country, allocations under Pradhan
Mantri Gram Sadak Yojana (PMGSY) were increased by 59% to Rs.12000
crore. The allocation for railways was increased from Rs 10800 crore in the
Interim Budget presented earlier this year to Rs 15800 crore for this fiscal.
(46.29% increase). Allocation for the Jawaharlal Nehru National Urban
Renewal Mission has been increased by 87 per cent to Rs.12887 crore.
A new scheme, Rajiv Awas Yojana will be introduced with an aim to make the
country slum- free in the next five years. Allocation for housing and provision
of basic amenities to urban poor enhanced to Rs.3973 crore in 2009-10. This
includes the provision for Rajiv Awas Yojana (RAY).
In order to develop oil and gas infrastructure in the country, the Government
proposes to develop a blueprint for long distance gas highway leading to a
National Gas Grid. This would facilitate transportation of gas across the
length and breadth of the country. Allocations for the Brihan Mumbai Storm
Water Drainage Project (BRIMSTOWA), initiated in 2007 and funded through
Central Assistance to address the problem of flooding in Mumbai, has been
enhanced from Rs.200 crore (as per the interim budget estimates) to Rs.500
crore.
It is a well-known fact that the power situation in the country is worsening
day by day. Allocation under Accelerated Power Development and Reform
Programme (APDRP) got a major boost with the finance minister proposing a
160% increment, taking the allocation for this scheme to Rs 2080 crore this
fiscal. Under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), allocation
increased by 27% to Rs.7000 crore. It is to be noted that RGGVY aims to
provide electricity access to all villages and habitations as per new definition,
to all rural households and to Below Poverty Line (BPL) families, free of
charge.
Moving the country towards an inclusive growth path, allocation under Indira
Awaas Yojana (IAY) increased by 63% to Rs.8800 crore and allocation of
Rs.2000 crore was made for Rural Housing Fund (RHF) in National Housing
Bank (NHB) to boost the resource base of NHB for refinance operations in
the rural housing sector.
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To facilitate flow of credit at reasonable rates, Rs.4000 crore has been
provided as special funds out of Rural Infrastructure Development Fund
(RIDF) to Small Industries Development Bank of India (SIDBI). This will
incentivise Banks and State Finance Corporations (SFCs) to lend to Micro and
Small Enterprises (MSEs) by refinancing 50% of incremental lending to MSEs
during the current financial year.
Allocations were also directed towards various organizations under the
ministry of civil aviation including Airport Authority of India (AAI) and
Director General of Civil Aviation (DGCA) to develop small and medium sized
airports and promote aviation security in the country.
Other policy initiatives for the shipping industry were also mooted as part of
which a separate ministry for shipping has been contemplated that will
spearhead the government’s initiatives for this vital industry. The
government expects more public private partnership projects in building
ports and facilitation of speedier acquisition of ships and equipments in its
100-days action plan. A large investment of around Rs.45000 crore has been
made towards shipping and inland water transportation projects.
Export Growth and other schemes
A series of initiatives has been announced which will go to boost exports in
the economy, ranging from enhanced assistance towards Export Credit and
Guarantee, allocations for market development assistance to flow of interest
relief to exporters for facilitation of export growth. Initiatives also include
enhancing allocations for Rural Infrastructure Development Fund (RIDF) and
incentivizing Banks and State Finance Corporations (SFCs) to lend to Micro
and Small Enterprises (MSEs) by refinancing at least 50% of incremental
lending to MSEs during the current financial year.
Medium to long term sustainability
Initiatives have been taken and allocations made to ensure wider availability
of a broad range of fertilizers to farmers at affordable prices. This will be
achieved through direct transfer of subsidy to the farmers that will
encourage them to generously use fertilizers and improve yield. With an
objective to rationalize the petroleum and diesel pricing policy, the
government has set up an expert group to advise the government on a
viable and sustainable system of pricing petroleum products that would best
suit our economy.
A large thrust has been provided towards privatization of public sector units
in this budget. Easing of regulations in the banking sector has also been
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announced. Scheduled commercial banks are now allowed to set up off-site
ATMs without prior approval, subject to reporting. A sub-committee of State
Level Bankers Committee (SLBC) has been set up to identify and formulate
an action plan for providing banking facilities in under-banked areas, over
the next three years.
Agricultural Development
The government has set a target of Rs.325,000 crore for the year 2009-10,
which is more than 7% above last years’ allocations. Programmes have been
directed towards debt relief to farmers by extending the time limit for
repayment by six months to December 2009. A special task force has also
been set up to examine the issue of debt taken by a large number of farmers
in some regions of Maharashtra from private money lenders and assess
possibilities of government intervention. Allocation under Accelerated
Irrigation Benefit Programme (AIBP) has been increased by 75%.
Inclusive Growth
The Swarna Jayanti Gram Swarozgar Yojana (SGSY) restructured as National
Rural Livelihood Mission is focused towards time bound poverty eradication
by 2014-15. In addition to capital subsidy at enhanced rates, interest
subsidy to poor households has been provided for loans upto Rs.1 lakh from
banks.
The corpus of Rashtriya Mahila Kosh is proposed to be increased from Rs.100
crore to Rs.500 crore over the next few years. A National Mission for Female
Literacy has been proposed to be launched with focus on minorities, SC, ST
and other marginalized groups with the aim of reducing the level of female
illiteracy to half in three years’ time.
To enable students from economically weaker sections to access higher
education, a scheme to provide full interest subsidy during the period of
moratorium has been introduced. This will cover loans taken from scheduled
banks to pursue any of the approved courses of study in technical and
professional streams from recognized institutions in India.
Initiatives towards welfare of workers in the unorganized sector have also
been taken; action has been initiated to ensure implementation of social
security schemes for those occupied as weavers, fishermen and women,
toddy tappers, leather and handicraft workers, plantation labour,
construction labour, mine workers, bidi workers and rickshaw pullers.
Allocation under National Rural Health Mission (NRHM) has been increased by
Rs.2057 crore. All BPL families are to be covered under the Rashtriya
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Swasthya Bima Yojana (RSBY), allocation for which has been increased by
40%.
Significant efforts are also being directed towards environment and climate
change. In continuation of the National Action Plan on Climate Change, eight
national missions representing a multi-pronged, long-term and integrated
approach will be launched. Budgetary allocation under National River and
Lake Conservation Plans has increased from Rs.335 crore to Rs.562 crore in
the current budget allocations. A special one-time grant of Rs.100 crore has
been given to the Indian Council of Forestry Research and Education,
Dehradun.
Institutional Development
The Unique Identification Authority of India (UIDAI) has been constituted to
set up an online database with identity and biometric details of Indian
residents and provide enrolment and verification services across the country.
A provision of Rs.120 crore has been made for this in the Budget. The first
set of unique identity numbers is expected to be rolled out in 12 to 18
months. Additionally, an amount of Rs.430 crore has been provided to
modernize police machinery in the States and to enhance national security.
Rs. 2284 crore has also been proposed for construction of fences, roads and
floodlights on the international borders.
Tax Proposals
A number of tax proposals have also been introduced as a part of this
budget. Share of direct taxes in the Centre’s tax revenues has increased to
56 percent in 2008-09 from 41 percent in 2003-04. This shows that
structural changes in direct taxes have been taking place. Further, the
government will propose additional changes by releasing the new Direct
Taxes Code within the next 45 days. The structure of indirect taxes is also
expected to be rationalized by accelerating the process for smooth
introduction of the Goods and Services Tax (GST) with effect from 1st April,
2010.
The Budget Financials
Budget 2009-10 has a total expenditure outlay of Rs.1, 020,838 crore; this is
more than 35% higher than the budget allocations made last year. A large
part of the increase can be attributed directly to the implementation of the
Sixth Central Pay Commission recommendations, increased food subsidy and
higher interest payment arising out of larger fiscal deficit in 2008-09. On the
revenue side, the gross receipts from the tax is budgeted at Rs.641,079
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crore for the year 2009-10 as against Rs.687,715 crore for the last year. This
increases the fiscal deficit from around 2.5% of GDP during the last year to
close to 7% of the GDP for the year 2009-10.
Conclusion
Overall, the budget reflects the commitment of the current government to
pull the economy out of the slowdown and chart a clear roadmap for a
sustained long term ‘high growth’ plan. To that end, there has been a
significant increase in spending, which has resulted in the ballooning of the
fiscal deficit as a percentage of GDP. This increase in fiscal deficit was
perceived negatively by the Indian corporate sector causing the Sensex to
drop by close to 900 points on a single day, which led many to discount the
budget as being unfavourable for industry! However, the finance minister has
clarified that he has consciously incorporated high spending with a clear
objective to boost spend and pull the economy out of the slow down; this will
inevitably increase fiscal deficit in the short term, which has to be managed
as the economy picks up momentum.
The allocations to infrastructure and agriculture are considered reasonable,
but the extent to which these would actually be spent is something that only
time shall reveal. The primary shortcoming comes from the lack of an
efficient administrative mechanism that would call for tenders, shortlist and
bid-out the jobs so that the funds allocated would actually be spent!
One can only hope that the implementation mechanism of the various
schemes introduced is streamlined and the actual budget allocations are
spent during the year for the intended purpose. This is where the track
record of the government needs to be enhanced and will be under scrutiny.
