Interim budget and the common person
The Interim Budget of the Central Government is presented during a year in which general elections are imminent. It authorises expenditure from April 1, 2014, pending a regular budget being presented by the new government.
Revised estimates (RE for 2013-14)
The interim budget presented on February 17, 2014, also sets out the RE for 2013-14 as against the budget estimates (BE), set out in February 2013.The focus of attention is on the fiscal deficit ( i.e. total expenditure minus revenue receipts and non-debt capital receipts) as a percentage of the GDP. The BE for 2013-14 indicated a fiscal deficit of 4.8 per cent of the GDP, for which the Finance Minister had drawn a red line which was not to be exceeded. The RE shows a deficit of 4.6 per cent of the GDP.
Showing the fiscal deficit in relation to GDP is somewhat deceptive, though this is internationally accepted as a measure of the deficit. Another way of looking at the deficit is to assess the fiscal deficit as a percentage of total expenditure and this shows a staggering 30 per cent. In other words, what is of concern is that government borrowing eventually has to be repaid.
Apart from the numbers, what is vital is the quality of the fiscal deficit. A closer look at the numbers reveals that there are large under-payments of subsidies (fuel, fertiliser and food). Again, profits and dividends transferred by the public sector units (PSUs) in the RE for 2013-14 are 64 per cent higher than the actual for 2012-13. As such, the euphoria of the red line not being crossed needs to be tempered by these fiscal gymnastics.
Interim budget estimates for 2014-15
Although the interim budget for 2014-15 shows a fiscal deficit to the GDP ratio of 4.1 per cent, the deficit as a percentage of total expenditure is around 30 per cent i.e. the same as in 2013-14. Adhering to the red line in 2014-15 would be that much more difficult in the light of the throw forward of subsidies from 2013-14 to 2014-15 and the unusually large PSU dividends and profits in 2013-14, which should rightfully have, in the normal course been part of the 2014-15 transfer. If the fiscal deficit in the regular budget for 2014-15 widens over the interim budget, the new government would be criticised for fiscal profligacy. If the new government tightens the fisc to correct what was done in 2013-14, it would face widespread discontent. Either way, the new government would have a choice between a rock and a hard place.
Giveaways in the interim budget
The choice of items on which indirect taxes have been reduced does raise some questions as to the intent of the measures. The excise duty reliefs for the automobile industry, particularly SUVs, smacks of a political economy trade-off. A whole range of excise duty reductions for capital goods and consumer durables and non-durables are ostensibly intended to kick-start the economy, but an upturn in activity is unlikely. Such sops would reflect patronage and a kickstart would need rapid large investments and political economy stability. But in all this, there is little by way of comfort for the common person.
Emerging problems in PSBs
The interim budget for 2014-15 provides for Rs 11,200 crore by way of capital infusion by the government in the PSBs. The structure of PSBs has been as it was at the time of nationalisation of banks. The history of the past 45 years has been that the weak banks are given blood transfusion and put on steroids to make sick ponies into race horses. But predictably, the sickness reemerges and further capital infusion becomes necessary. In the 1990s, the weak PSBs were, for a while following the narrow banking model i.e. keeping the credit-deposit ratio low relative to the system. Unfortunately, the urge to lend and patronise once again made the resurgent stallions sick ponies. Ultimately it is the common person who bears the burden of unsustainable policies.
Price stability and growth
There is an unusual message in the interim budget to the Reserve Bank of India (RBI): "In a developing economy we must accept that when our aim is high growth, there will be a moderate level of inflation. RBI must strike a balance between price stability and growth while formulating monetary policy." As India progressively opens up to the global economy, relative inflation between the major industrial countries and India becomes increasingly vital. As Indian inflation rates are substantially higher than in the major industrial countries, a depreciation of the rupee is inevitable. But our macho spirits will not allow for a depreciation of the rupee, especially so close to the general elections.
The RBI rightly set out a glide path of reducing the Consumer Price Index (CPI) inflation to 8 per cent by January 2015 and 6 per cent by January 2016. One would have wished that the finance minister had strengthened, or at least supported the RBI stance. Quite the contrary, the government stance will increase the pressures on the RBI to relent on its present monetary policy. In the run-up to the general elections, monetary policy would have to bear a disproportionate burden of holding up the macroeconomic balance. All that the common person can do is to recall the sagacious words of the sage economist Professor P R Brahmananda, who said: "Not caring about inflation is like going into battle without caring for the wounded, the dying and the dead". The agony of the common person will worsen in the ensuing months.
Please Note: This article was first published in The Freepress Journal on February 24, 2013. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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