P Chidambaram's last budget pays tribute to the rating agencies, irrespective of the cost to the economy.
As expected and true to form, Union Finance Minister P Chidambaram’s last budget was all about how well the government has done in holding down the fiscal deficit during 2013-14. Indeed, ever since Chidambaram returned to the Ministry of
Finance in late 2012, his one priority has been to reduce the fiscal deficit lest India fall afoul of the international credit rating agencies. The finance minister has also used the presentation of the interim union budget for 2014-15 to defend the record of the United Progressive Alliance government (I and II), but that exercise in self-congratulation does not require analysis. It is the fiscal performance in 2013-14 that calls for close examination.
Last year, while presenting the union budget for 2013-14, the finance minister said his red line for the fiscal deficit was 4.8% of the gross domestic product (GDP). He has even bettered that – the 2013-14 revised estimates (RE) show a fiscal deficit of 4.6% of GDP. How has this been achieved? Is it for real? What has been the impact on growth and incomes? It has been the same story two years in a row. In the beginning, make wildly optimistic predictions about how tax and non-tax revenue will grow, and propose some healthy increases in Plan expenditure. Mid-way through the year when things do not look good on the revenue side, slash spending – especially Plan expenditure – with scant regard for the growth momentum. And then repeat the same process the next year. This is what happened in 2012-13 and we had warned then in these columns of this turn of events (“At the Feet of Rating Agencies”, 9 March 2013). This has since come true, though it gives us no satisfaction to be proven right.
At the time the finance minister made an exaggerated budget prediction of a 19% growth in tax revenue in 2013-14 over 2012-13. There has been an increase of just 12% (2013-14 RE). So the finance minister has taken an axe to Plan expenditure. Total expenditure in 2013-14 has been just 4.5% short of the budgeted amount, but Plan expenditure ends up as much as 14% lower than the 2013-14 budget estimates (BE). No sector – infrastructure, rural development, or the social sector – has been spared the cleaver in the anxiety to avoid a downgrade by the London and New York-based rating agencies. The argument of the finance minister that last year’s budget “over-provided” allocations will simply not wash; this was nothing but a large-scale holding back of allocations. It is evident that once again the Government of India has chosen to ignore the international lessons of the 1990s that the last thing a government should do in the name of fiscal deficit reduction is slash potentially productive expenditure. In 2013-14, total Plan expenditure – capital and revenue – has grown by 15% over 2012-13 in nominal terms, even if it still ends up substantially lower than what was initially budgeted for. However, this is not enough to compensate for the slow or no growth in Plan spending over the past three years. Aggregate Plan expenditure in 2013-14 is only 25% higher in nominal terms than in 2010-11, a zero or negative growth in real terms considering the double-digit inflation in the intervening years.
Since spending cuts alone are not enough to hold down the fiscal deficit (nor for that matter the bounty from auction of spectrum), the finance minister has turned to other unhealthy measures. The year 2013-14 has seen the central Plan fall short of its budget outlay by 10% partly because public sector enterprises (PSEs) could not mobilise the required internal and external budgetary resources. Yet, the interim budget has been able to extract dividend payments from the PSEs of as much as 44% more than the 2013-14 BE of Rs 29,870 crore. How can the PSEs not find resources for investment but come up with large dividend payouts? The Ministry of Finance must have turned the screws on the PSEs and demanded a massive hike in dividend payments, including possibly advance payments from 2014-15. So much for the sanctity of the budget exercise.
The interim budget does make provisional allocations and projects tax revenue collections for 2014-15 (including, one must add, the maintenance of Plan outlay at the same low level as 2013-14 and a sharp reduction of the fiscal deficit to 4.1% of GDP) though the job at hand was really only to seek a vote-on-account approval for the first three months of 2014-15. Those numbers may tie the hands of the next government but only a bit. Of greater significance is the cut in excise duty by 2% across a number of capital goods and consumer products and the large duty reductions on automobiles, both apparently to boost demand for the manufacturing sector. It is strange that the finance minister chooses to hold down Plan spending – expenditure which would have added to productive capacity and boosted demand – and then goes on to cut tax rates to prop up certain kinds of demand, including for sports utility vehicles. That is Chidambaram’s last hurrah at North Block.
