The Budget 2008-09 seems to have been designed based on a one-size-fits-all formula, focusing on small and marginal farmers, consumers, social development, education and health, infrastructure, and a large number of tax-payers. The budgetary proposals have reduced overall tax burden by Rs 1,39,593 crore over the Budget estimate of Rs 54,83,122 crore for 2007-08.
The major reductions have been effected in excise duty on production of consumer goods and customs duties on import of raw material, capital goods and inputs for industry. These concessions are expected to augment demand for consumer goods and services, likely to result in higher production and larger employment.
The next step, of raising I-T exemption limits and the limits for seniors, will enhance household incomes and may result in higher savings capacity and greater consumption. As such, the economy may face demand pressures and a surge in inflation in 2008-09 unless there is an adequate supply of goods and services. In a nutshell, the above relaxation in the Budget will only result in a short-term spurt in economic growth.
Capital expenditure
Government capital expenditure is a pace-setter for long-term investment in infrastructure, construction activities and investment in heavy industries.
Surprisingly, the Budget proposes massive cuts in capital expenditure, from Rs 1,22,621 crore as per the revised estimates for 2007-08, to Rs 92,765 crore, budgeted for 2008-09, reflecting an absolute downward slash of Rs 29,856 crore.
Alternatively, capital expenditure will form just 12.3 per cent of total Central expenditure in 2008-09, against 18 per cent in 2007-08. The Budget, thus, will result in a drastic slump in the proportion of government investment compared with the 19.3 per cent for 2004-05, 23.5 per cent 2003-04 and 18 per cent for 2002-03. Such a fall in investment expenditure can result in lower demand for investment goods.
However, overall investment in the economy would grow due to entry of private sector in power generation, communication and manufacturing industries.
Capital expenditure in public sector would not have been sized down if interest payment by government had not increased from Rs 1,71,971 crore in 2007-08 to Rs 1,90,807 crore in 2008-09 and total debt service was not as high as Rs 5,26,038 crore in 2008-09. This is a consequence of heavy market loans, short-term borrowings and other borrowings of government from non-RBI sources.
Borrowing to repay
A cruel fact is that more than a third of government revenue is swallowed by debt servicing and that the government often resorts to market borrowing to pay debts. On top of borrowings, in the present Budget, the Government has issued bonds instead of giving subsidies to Food Corporation, and the oil and fertiliser sectors.
This is a mechanism to contain the deficit financing for the present but, in the long term, the Government will have to redeem these bonds by, again, resorting to borrowing.
Though the revenue deficit is declining and is placed at 1.1 per cent of GDP for 2008-09, we have to be cautious and vigilant on bulky revenue expenditure on current account. The Government has shown a commendable performance by reducing revenue deficit consistently but by next two years revenue account should show surplus of at least 2 per cent.
This surplus can be used for capital expenditure and is achievable if receipts from PSU disinvestment are used to repay government debt.
The major reductions have been effected in excise duty on production of consumer goods and customs duties on import of raw material, capital goods and inputs for industry. These concessions are expected to augment demand for consumer goods and services, likely to result in higher production and larger employment.
The next step, of raising I-T exemption limits and the limits for seniors, will enhance household incomes and may result in higher savings capacity and greater consumption. As such, the economy may face demand pressures and a surge in inflation in 2008-09 unless there is an adequate supply of goods and services. In a nutshell, the above relaxation in the Budget will only result in a short-term spurt in economic growth.
Capital expenditure
Government capital expenditure is a pace-setter for long-term investment in infrastructure, construction activities and investment in heavy industries.
Surprisingly, the Budget proposes massive cuts in capital expenditure, from Rs 1,22,621 crore as per the revised estimates for 2007-08, to Rs 92,765 crore, budgeted for 2008-09, reflecting an absolute downward slash of Rs 29,856 crore.
Alternatively, capital expenditure will form just 12.3 per cent of total Central expenditure in 2008-09, against 18 per cent in 2007-08. The Budget, thus, will result in a drastic slump in the proportion of government investment compared with the 19.3 per cent for 2004-05, 23.5 per cent 2003-04 and 18 per cent for 2002-03. Such a fall in investment expenditure can result in lower demand for investment goods.
However, overall investment in the economy would grow due to entry of private sector in power generation, communication and manufacturing industries.
Capital expenditure in public sector would not have been sized down if interest payment by government had not increased from Rs 1,71,971 crore in 2007-08 to Rs 1,90,807 crore in 2008-09 and total debt service was not as high as Rs 5,26,038 crore in 2008-09. This is a consequence of heavy market loans, short-term borrowings and other borrowings of government from non-RBI sources.
Borrowing to repay
A cruel fact is that more than a third of government revenue is swallowed by debt servicing and that the government often resorts to market borrowing to pay debts. On top of borrowings, in the present Budget, the Government has issued bonds instead of giving subsidies to Food Corporation, and the oil and fertiliser sectors.
This is a mechanism to contain the deficit financing for the present but, in the long term, the Government will have to redeem these bonds by, again, resorting to borrowing.
Though the revenue deficit is declining and is placed at 1.1 per cent of GDP for 2008-09, we have to be cautious and vigilant on bulky revenue expenditure on current account. The Government has shown a commendable performance by reducing revenue deficit consistently but by next two years revenue account should show surplus of at least 2 per cent.
This surplus can be used for capital expenditure and is achievable if receipts from PSU disinvestment are used to repay government debt.
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