Introduction
Many different words have been
used to describe this budget. ‘Reasonable’, ‘Responsible’, ‘Sound’, ‘did no
harm.’ The words that have not been used are ‘reformist’ or ‘big
bang’. Those who were dis-appointed fall largely in the latter camp. I would call it a “conventional budget,”
where, by conventional I mean what one had begun to expect once the reforms of
the 1990s were over. Its main distinguishing
feature is the determination to hold to fiscal deficit fixed in the budget and
outlined in the long term policy stance. This was a welcome and necessary departure
from the budgets since 2009-10. For the rest it was the usual socio-political
document, with a number of expenditure allocations to different groups to
reassure them of its inclusive nature and incremental measure to correct small
anomalies in infrastructure sectors, presumed to be the central propeller of
government planned development programs.
Popular Expectations
Some expected growth oriented budget and
others feared a populist budget. Neither
the expectations nor the fears came true. Though the Finance Minister opened
with a statement on the importance of economic growth for generating jobs, inclusive
growth and revenues which could be used to help the poor, there was no headline
making reform that could enthuse the stock markets or the domestic industrial
community. Measures to incentivize
investment, savings, infrastructure, bond markets were neither much better nor
much worse than those seen in earlier budgets.
Similarly there were a number of expenditures and increases in the same,
directed at the Welfare of various groups, at food security and malnutrition,
education and skill development, agriculture, textile workers and small
industry.
Benchmark: Macro-Pivot
Personally,
the budget achieved the professed objective of the Finance minister to contain
the fiscal deficit to 5.3% of GDP in 2012-13 and to reduce it to 4.8% of GDP in
2013-14. Though the growth assumption on
which this was based were optimistic, my view is that this finance minister is
very serious about this objective and will therefore ensure that it is
achieved. This is an important step in
restoring the fiscal sustainability and macro-economic balance, some of the
most disturbing symbols of which are the current account deficit of 4.2% of GDP
during the last two years and the high rate of consumer price inflation.
Why is this so important? In a paper in 2012 I showed how many growth
stars became shooting stars because they were not able to deal with
macro-economic shocks emanating inside and outside their country. Thus it is
essential to deal with this issue if we want to restore growth to a reasonable
level and sustain it for the next few decades. Further, my analysis of the
macro-economic situation in India, suggests that the best way to remove the
cyclical down turn in the Indian economy is a “Macro-pivot,” which rebalances the fiscal and monetary policy, by
tightening the former and loosening the latter.
Again this is based on research which showed that economies showing
similar symptoms of macro imbalance as us, such a pivot led to an increase in
the average growth rate in one to three succeeding years. Further the evidence very clear when the fiscal
tightening was the result of expenditure reduction but mixed or non-existent
when it was the outcome of a tax increase
Fiscal Tightening
The finance minister has
accomplished this reduction in the fiscal deficit by correctly focusing on the
reduction of subsidies, which were the cause of the unsustainable rise in the
fiscal deficit. Further he has achieved
it without cutting capital expenditure (government investment). In fact capital expenditures are budgeted to
increase by 27% in 2013-14. There is
however, one trend that has not been reversed, which needs to be, to put the
fiscal deficit on a sustainable trend.
Revenue expenditures net of subsidies, are projected to increase at an
even faster rate that the increase in GDP.
Thus the ratio of these expenditures to GDP is likely to increase
significantly.
Further Reforms
The finance minister has also mentioned a
number of pending bills, such as the DTA, GST, Pensions and Insurance, that
will help improve the investment climate.
If his expectation-hope of these bills in the budget of subsequent
session of Parliament fructify, then enough momentum will be generated to
return to a growth rate of over 6% in 2012-13.
If these and other administrative and procedural reforms, such as the
setting up of an effective ‘Road Regulatory Authority,” that have been talked about do not come
through, then growth is likely to be around 6% (+/- 0.5%).
A version of this note appeared in the Op Ed page of The Hindu on March 1, 2013 under the banner, “The path to Fiscal Sustainability,” at http://www.thehindu.com/opinion/op-ed/the-path-to-fiscal-sustainability/article4463052.ece?homepage=tru
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