Introduction
The question I as an economist,
have been asked many times in the past and will after this one is, “what do you
think about this budget?” To make sense
of the diverse and contradictory answers from supposedly neutral experts (that
the average person will receive), one has to know the benchmark the person was
using. What were the expectations
against which the budget was assessed? These related primarily to stabilizing
the macro-economic situation and secondarily to boosting investment.
Benchmark
Let me therefore start by
defining my benchmark. The rate of
growth of the Indian economy has been on a downtrend during the last three
years to reach a projected 5% in the
current year. Over the same period, the
current account deficit reached 2.8% and then jumped to an unprecedented 4.2%
of GDP and investment growth halved and then halved again. At the same time inflation measured by
different indicators remained stubbornly high.
Consequently the rating agencies threatened to reduce India’s global
rating to Junk status. The political
system including the government took serious note of this potential crisis in
the last quarter of 2012 and started taking policy action to free the
administered prices of petroleum products and increase FDI limits in Aviation
and Retail. This was good start, and
helped to reverse the extreme pessimism that had gripped domestic and
international investors. Phase I of an
operation to retrieve the situation and reverse the trends in investment and
growth.
Phase II of a Reform Process
I saw the Budget as Phase II of the process, whose focus was on
reversing the fiscal trends as a critical input into overall macro-economic stabilization. The critical test, as I pointed out in a
media discussion about a month ago, would be to see if the Finance minister is
able to deliver on his long term fiscal deficit strategy and the targets of
5.3% and 4.8% for the years 2012-13 and 2013-14 respectively and reverse the
trend of rising subsidies and government current expenditures and transfers. Tested against this benchmark the 2012-13
budget has done well (5.2% and 4.8%) with a few caveats. Much of the increase
of the fiscal deficit in 2009-10 (the high point) was due to a jump in
subsidies. Returning subsidies to the 2%
of GDP that they had stabilized at in 2007-8 was therefore an essential element
of Fiscal stabilization. A projected 10%
decline in the subsidy bill is reassuring even if this decline is
exaggerated. However total current expenditures are
projected to increase by about 14% next year, above the projected growth of GDP
of 13.5%, which in my view is based on an optimistic growth projection. Thus current expenditures net of subsidies
will increase as a proportion of GDP.
This up trend is a little worrying as the revenue deficit (RD) will only
decline by about 0.5% of GDP even under the optimistic growth projection. As the RD is approximately equal to the
Governments Investment – saving gap, the impact on the current account deficit
(0.5%) is not sufficient to bring it down below 3.6% or so. On the other hand, capital expenditures have
increased by 27%, thus this reduction has been achieved while raising
government investment, which should have a positive effect on overall
investment.
Mesures & Reform Hints
There are also some measures in
the budget to increase private investment and savings. The introduction of an investment allowance
for large investors has however, been accompanied by rise in surcharges on
corporate profits. This fiscal twist
(positive and negative) could in principle bring forward and accelerate private
investment expenditures. This will
however, only happen if the promise that the rise in surcharge is temporary is
believed by investors? Credibility is
the key to its success. There was also
some expectation that clear explicit administrative and procedural measures
would be taken to reverse what has been perceived as creeping return to
permit-inspector raj in the revenue (tax) department (CBDT, CBEC). The budget did not, unfortunately, give a
convincing demonstration of this reversal.
Phase III Vital
There is an underlying concern
that many in the UPA and in other parties do not realize the seriousness of the
situation, in which the rate of growth of GDPMP is likely to be an abysmal 3.5%
in 2012-13 and are again becoming complacent that the measures already taken
will propel us back to 6.5% and then to 8%.
In my view this will not happen without further policy, regulatory and
institutional reforms. I look forward to
phase III of the reform process that can make this return to sustained high
growth likely.
A version of this note appeared on the Op ed page of the
Indian Express on March 1, 2013 under the banner, “Reform Phase II,” http://www.indianexpress.com/news/reform-phase-two/1081357/
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