Open Forum
New Delhi, 20 February 2013
Poll-Eve Budget
CHALLENGES FOR FM
By Col (Dr) PK Vasudeva
(Retd)
Will Finance Minister P
Chidambaram be able to revive India’s
growth story with Union Budget 2013-14? Fingers are being kept crossed, despite
the odds. Undeniably, the first advance estimates for 2012-13 released by the
Central Statistics Office (CSO) recently puts growth at 5 per cent — the lowest
since the 4 per cent of 2002-03 and a far cry from the average 8.5 per cent
recorded during the eight years from 2003-04 to 2010-11. This is the gloomiest
projection of India’s
current economic activity by any agency so far. The official GDP growth
estimate of the CSO is a shocker for the RBI as recall that only on January 29
it had projected growth for this fiscal at 5.5 per cent and the IMF has just
revised its number down to 5.4 per cent. Moreover, two days later, the
Government brought down its GDP growth estimate for 2011-12 to 6.2 per cent,
from the previous 6.5 per cent.
It is not the growth
slowdown per se that is the real worry. A hallmark of the India growth
story of the past decade was that it was essentially investment-led. The
average annual growth in gross fixed capital formation (GFCF) during 2003-04 to
2010-11, at 13.2 per cent, even exceeded the corresponding overall GDP growth.
Since then, it has been just the opposite, with the growth in GFCF — 4.4 per
cent in 2011-12 and an estimated 2.5 per cent for this fiscal — falling below
general GDP growth.
Indian economy needs
investments not only to boost productivity that comes from building new roads,
power plants or industrial estates, but also to generate employment and
incomes. Without the latter, it is not possible to even sustain consumption
beyond a point. The fact that private final consumption expenditure growth is
pegged at a mere 4.1 per cent this fiscal, as against 8 per cent in 2011-12,
shows how the drying up of investments is now beginning to impact consumption
as well when the unemployment and existing jobs are under threat.
Finance Minister P Chidambaram
has also argued that a lower fiscal deficit will not only avert a rating
downgrade threat but also bolster economic growth prospects as borrowing costs
for private investors will fall, helping lift capital investment growth from a
five-year low.
Fiscal consolidation for
higher growth and lower inflation goes beyond the annual budget. The Medium
Term Plan for three years under the FRBM Act 2003 is not opaque with clear
breakdown of revenue and expenditure projections; nor are the assumptions underlying
these clear.
The Government therefore
will have to push the growth pedal that much harder. Although it has moved
ahead since September 2012, the pace is still too slow for international
observers. Expectations of a growth-inducing budget had already built around
Chidambaram’s stated commitment to reversing the fiscal and trade deficits.
This data can only strengthen those expectations but they must be tempered by
the political limits to reducing subsidies in an election-eve budget.
The IMF reckons India’s
potential to grow may have slipped by a couple of percentage points and pulling
back would require some hard decisions on reforms, particularly on deregulating
the financial sector. Investors, too, are waiting for reforms to show up in the
growth-inflation dynamic. Credit rating agencies had thawed to India upon
sighting green shoots of recovery.
The slowdown is
widespread with only a few sectors — construction, community personal and
social services, and mining — showing increases over last year. Manufacturing
has been worst hit.
The country’s high
savings rate, has underpinned much of its growth and investment boom of the
past decade. The Government’s latest national income data shows a significant
fall in gross domestic savings in the Indian economy from 34 to 30.8 per cent
of GDP between 2010-11 and 2011-12. But indications are that the savings rate
could drop even further. The Japanese brokerage firm, Nomura, basing its
calculations on more current trends in investments, reckons that it might touch
27 per cent this fiscal.
The correct parameter is
elimination of all non-productive and non-developmental expenditure, and coming
out with specific schemes and projects which are development and
growth-oriented.
Subsidies for fuel, food
and fertiliser are a major non-developmental item. Total elimination is not
feasible. But mere tinkering and periodic price increases do not touch the
basic underlying issues. A few examples are, dismantling the administrative
price mechanism for fuel, non-examination of the cost structure for possible
reduction, understating the budgetary provision and thereby the budget deficit
and problems involved in targeting intended beneficiaries and the element of
diversion.
The Railways pose a
serious problem. Recent increases in passenger fares amount to tinkering,
without any medium-term strategy. Freight charges continue to subsidise
passenger fares, which are indefensible when faced with inflation. The
operating expenses ratio of the Railways is at an all-time high, resulting in
lack of internal resources for priority investment with consequent dependence
on government budgetary support.
Mobilisation of revenue
is a tool for fiscal sustainability. It should be done without impeding growth.
Tax exemptions are numerous and substantial, costing more than Rs 4 lakh crore
to the Government.
Tax reform like
goods-and-services tax (GST), improvement in tax administration and bringing unaccounted
money in the tax net are other issues. Disinvestment is a short cut to reduce
budget deficit and not a cure for fiscal ills.
Hopefully, the Budget
will be driven by economic reality. The least we assume is that the spending
cuts that have taken effect over the last three months will carry on. These
measures have only contributed to savings for about a quarter of the current
fiscal year ending 2013, and so they should make a full year’s contribution in
2014 — all the better for the country’s credit profile.
One encouraging fact is
that the spending cuts have started across the board, and even the defence
expenditure has not been spared. The number of State-sponsored schemes is
likely to get drastically reduced, with a particular focus on areas with
inefficiencies and wasteful spending. Therefore, the deficit target of 4.8 per
cent for 2014, after the 5.3 per cent set for 2013, looks within reach.
Chidambaram is likely to
raise its tax intake — another necessary, if unpopular, move. It would not be
too ambitious to expect personal tax rates and excise duties to be increased,
but it would be folly not to expect tax loopholes to be closed. The biggest
wildcard is the countrywide GST, which, by supplanting lower-level taxes and
levies, will reduce red tape, oil the revenue-creation process, and ultimately
promote growth.
The FM has been advised
linking Mahatma Gandhi National Rural Employment Guarantee Scheme with
agriculture to help meet the shortage of farm labour in the sector.
Chidambaram has already
slashed actual public expenditure in the current fiscal year by
some 9 per cent from the original target. So the plan for 2013/14 would in
effect keep a lid on spending, limiting it to a similar rupee level or slightly
higher.
The task of the FM in the
ensuing election year is difficult to control fiscal deficit and inflation
within reasonable limits but with ‘animal spirit’ and sustained reforms he
should be able to bring a balance in the budget.—INFA
(Copyright, India News and Feature Alliance)
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