The Union Budget 2010-11:
Reform and Development Perspectives
CPR, ICRIER, IDF, NCAER, and NIPFP
March 6, 2010
Highlights of the Proceedings
discussion on “The Union Budget 2010- 11: Reform and Development
Perspectives” was held on March 6, 2010 in New Delhi. Five leading
Indian economic policy research ins titutes came together to present their
assessment of the reform and development implications of the Union Budget.
For the fourth year running, the heads of the five institutes, CPR, ICRIER,
IDF, NCAER, and NIPFP provided a more reflective view of the Budget, its
highlights and implications. The panel comprised Suman Bery, Shubhashis
Gangopadhyay, Rajiv Kumar, Pratap Bhanu Mehta and M. Govinda Rao. The
discussion was moderated by T.N. Ninan, Chairman and Editorial Director of
the Business Standard. The seminar ws held at the Shangri-La Hotel.
The discussion covered a broad range of issues, from governance, sectoral allocation of resources, fiscal consolidation to growth, inflation, and service delivery. This brief summary provides some highlights but obvious ly cannot do justice to the breadth and depth of the discussion among the panel and the wide-ranging questions and answers with the large and fully-engaged audience of over 250 participants.
T.N. Ninan initiated the discussion by pointing to some concerns that go well beyond the Budget. The fact that the current level of expenditures on subsidies comes close to the overall resources that may be needed to eliminate poverty through direct transfers to people below the poverty line is quite significant. This further emphasises the importance of targeting of benefits to the needy and moving over to systems such as coupons that may be more efficient at delivering income support. Ninan also drew attention to the fact that the recent growth of revenues from personal income tax has been quite insignificant in response to tax cuts, suggesting that we may well have reached the limits of further liberalisation of the income tax regime.
The panelists addressed several dimensions of the Budget proposals to
highlight their implications for the economy’s development prospects.
The Budget speech gave prominence to returning to high growth to generate
the resources necessary for development. The recovery of the economy in
2009 from the external shocks of the global crisis of 2008-2009 has been
quick and robust. The role of the fiscal stimulus and fiscal stance during
this period has been supportive of this recovery. However, a return to a
sustainable fiscal balance is necessary. The recommendations of the
Thirteenth Finance Commission to bring overall debt to GDP ratio at the
central level to more manageable levels seem to have been internalised in
the Budget proposals. However, the Budget’s path to a revenue surplus
appears to be far more gradual than that proposed by the Finance
While the Budget proposals have attempted to keep growth in subsidies under check, there was a concern expressed that the outcome on subsidies will overshoot the Budget provisions. There is a need to adopt a more sustainable petroleum pricing regime as suggested by the Kirit Parikh Committee Report. The need for fiscal consolidation and fiscal reforms to sustain high rates of growth remains a concern.
The Budget proposals were discussed in the context of their implications for inflation. While one view suggested that the trends in inflation rates based on WPI are likely to subside in the next six months, there were also dissenting views. Food inflation may continue longer than suggested by the trends. It was recognised that there has been an increase in the purchasing power of consumers that is cushioning them, which might explain why inflation has not become a bigger issue. Various welfare programs like NREGS have helped in protecting the purchasing power of the people at the lower end of the income distribution. The new income tax proposals may have been led by the need to strengthen demand as the recovery proceeds.
There was broad consensus among the panelists that the time has come for building state capacity in a significant way. It would be difficult to sustain high growth to bring about faster development if the state cannot perform its functions well. Whether it is urban infrastructure, food safety or delivery of education and health services, there is a need for huge capacity development and the ability to formulate sound strategies. There is a need to raise resources of the government to build capacity. The scaling up of government’s development projects have other consequences also such as moving away from identity politics to development politics. There was also a perspective that the strategy of recent budgets is to expand the ‘knowledge base for reforms’.
The improvement in the fiscal position has been possible because some of the items last year were one-time expenditures, such as the central pay commission arrears and farm loan waiver. The proposals on indirect taxes this year, however, do not reflect bigger steps towards the GST. There are far too many rates and exemptions still. An opportunity for rationalisation had been missed.
The sectoral allocations in the budget point to the need for examining various trade-offs. The provisions for health and education have not picked up significantly even if we consider the state and central government budgets together. Agriculture remains a challenge. Although its importance in GDP has decreased, the challenge of increasing productivity has not been met. The concern is that we do not have a rational land use policy either for agriculture or for other sectors. The Budget numbers show that there is a problem of absorptive capacity of the government. The allocations do not get fully utilised and therefore the demand for finances from the sectors do not increase.
Finally, there was a concern expressed about the absence of a focus in the Budget on outcomes and more generally, the lack of follow through on evaluations of impact. What good are evaluations of programs if the evaluations are not taken into account in the formulation of policies and programmes? There is a need for commitment to learning from evaluations. Public services will have to be better targeted and delivered more efficiently.
The Moderator ended the seminar with his closing remarks and commended the panel and the audience for the richness of the discussion.
10.00 A.M. Welcome and introductory Remarks by
Mr. Suman K. Bery, Director-General, NCAER
10.10 A.M. Opening remarks by the Moderator
Mr. T. N. Ninan, Chairman, Business Standard
10.20 A.M. Presentations on the Budget 2010-11
Mr. Suman K. Bery, Director-General, NCAER
Dr. Pratap Bhanu Mehta, President, CPR
Dr. M. Govinda Rao, Director, NIPFP
Dr. Rajiv Kumar, Director & Chief Executive, ICRIER
Dr. Shubhashis Gangopadhyay, Research Director, IDF
11.20 A.M. General discussion
12.20 P.M. Comments by the Panelists
12.45 P.M. Final remarks by the Moderator
Vote of thanks by Dr. Shekhar Shah, Economic Adviser, The World Bank
1.00 P.M. Lunch