Mukherjee budget bows to politics By Kunal Kumar Kundu
BANGALORE - The plunge in Indian stock prices that greeted Finance Minister
Pranab Mukherjee's budget on Monday says as much about the inability of market
participants to recognize reality before it is thrust in their faces as it does
about the dismal content of Mukherjee's budget statement.
The benchmark Sensex slumped 5.8%, the most since early January, as if shocked
at the scale of the budget deficit proposed by Mukherjee and at the lack of a
coherent reform agenda.
Yet only three days earlier, the budget for Indian Railways, whose finances are
kept separate from the federal government accounts, showed clearly which way
the wind was blowing. Railway Minister
Mamata Bannerjee kept fares unchanged, announced new subsidies and earmarked a
mere 3% of total revenue to develop the 156-year-old network. As I stated at
the time, "Going by this, it is quite likely that the union budget might not be
much different and the supporters of reform might be disappointed." [1]
The day after the election result was announced in mid-May, sweeping a
Congress-led coalition into power while banishing to opposition the parties of
the left, a 17% surge in stock prices epitomized the bullish hopes for the new
government, hopes not borne out by reality. The market continued to ignore
global realities thereafter. Not surprisingly it tanked on Monday's budget day.
Like the railway budget, the Mukherjee budget was a give-away affair largely
devoid of imagination and notably empty of any indication of real moves towards
fiscal prudence. As admitted by Mukherjee, it was a pro-poor, pro-rural area
budget - and surely nobody's going to begrudge that.
The target for agriculture credit flow for the financial year to next June 30
was set at 3,250 billion rupees (US$66 billion), up from 2,870 billion rupees.
Allocation for the National Agricultural Development Plan, or Rashtriya Krishi
Vikas Yojna, was increased by 30%, while that for the Accelerated Irrigation
Benefit Program was raised 75%. The budget also provided for a 1% interest rate
subvention to farmers who repay short-term crop loans on schedule, thereby
bringing down the effective rate to 6%; towards this end, 4,110 million rupees
was allocated for the year. The deadline for the debt waiver scheme was
extended by six months to December 31, 2009.
The budget also provides 20 billion rupees for rural housing and substantially
increases outlays in various other programs. Funds to the flagship National
Rural Employment Guarantee Scheme will go up as much as 144% and, under a
proposed Food Security Act, rice and wheat will be provided to the poor at 3
rupees per kilogram.
Spending on physical infrastructure will also increase, by about 1,000 billion
rupees, an amount that can be supported by the government-owned India
Infrastructure Finance Co Ltd and banks.
From the reform point of view, the most important positive statement was an
assurance that plans for a Goods and Services Tax are on target and it will be
introduced by 2010. This will go a long way towards simplifying the highly
complicated indirect tax structure.
The good news on the budget ends about there, as reforms took a back seat and
politics won out over economics.
Certainly, at this stage in the financial crisis that is hitting India just as
it is the rest of the world, the government had to choose growth over fiscal
restraint to bring the economy back on track and prevent the growth rate from
plummeting. During the last quarter of the just-concluded fiscal year,
government final consumption expenditure grew 21.5% year-on-year, just above
the full-year increase of 20.25%. As a result, although private demand was
anemic, gross domestic product (GDP) growth was higher than initially expected.
However, government expenditure is not a panacea and it is important that the
government start to reduce the deficit to prevent inflation creeping up and to
avoid higher interest rates that can prevent the nascent recovery from
blooming. This budget provides no clarity as to how the government will
withdraw from the market.
The biggest disappointment has to be a clear lack of a roadmap with regard to
fiscal prudence. The government's fiscal deficit for the current financial year
is pegged at a higher-than-expected 6.8%. Add the deficits of the various state
governments along with the various below-the-line items such as oil bonds and
fertilizer bonds, and the deficit would be tantalizingly close to 13%. Even
this estimate seems optimistic, as the budget makes no provision for the
proposed Food Security Act and assumes that current global prices of oil and
fertilizers will not rise. It optimistically projects a 15% rise in corporate
tax receipts, even as income-tax revenue declines 9%.
With the deficit having more downside to it, nerves were further jangled as the
budget failed to give any indication as to how the government will go about the
fiscal consolidation process (after having increased the fiscal deficit
target), unlike earlier when the Fiscal Responsibility and Budget Management
Act was introduced in 2003. While the Finance secretary did mention after the
budget that he intended to bring the deficit down to 4% by 2012, there was
nothing to inspire confidence that the target could be achieved.
The easiest way to cap the fiscal deficit would be to move aggressively on the
disinvestment front - selling of state-held assets - but that was not to be,
clearly because of a lack of political consensus among even the so-called
strong coalition partners and despite the absence of the obstructionist, not to
say destructive, parties of the left following the May election results.
Whatever its perceived mandate, the government obviously does not have enough
political consensus to bring the desired reforms to the table. Despite the
strong thrust on disinvestment in the Economic Survey released last week, the
government is not going to do the needful, fearful of the political
consequences. Banks and insurance companies have been kept out of the
disinvestment proposals and the amount of funds to be derived from selling off
state holdings will be small as sales focus on undertakings of lesser
importance and value.
The budget proposals have the appearance of back-seat driving by the left. I
certainly cannot recall another budget that was not criticized by the left
despite it being in opposition. The Congress party's coalition partners have
made enough noise to ensure that the government has no stomach for reforms. The
market's failure to read those signals earlier resulted in the post-budget
disappointment and stock plunge.
Nor was there mention of even the intent of bureaucratic or spending reforms
that could have helped the government curb a host of wasteful expenditure and
plug the enormous amount of leakage in delivering funds - a maximum of only 10%
to 15% of resources spent by the government on various developmental projects
goes to the intended beneficiaries, as has been well documented.
The government's revenue deficit now accounts for close to 71% of the budget
deficit. While a part of the revenue expenditure does add to growth, a greater
part goes on housekeeping expenses. Given that the government needs to borrow
to bridge the deficit gap, we have a situation where only about 30% of the
borrowing will be used for productive purposes, yet this is expected to earn a
return that meets the financing cost of the entire borrowed amount. That's a
pipe dream.
With inadequate disinvestment proceeds and a government unable to temper its
profligate ways, investment in infrastructure, among other sectors, continues
to be inadequate.
Hence, while the Economic Survey stressed the need to spend about 9% of GDP on
infrastructure during the 11th five-year plan (2007-2012), the envisaged
investment in infrastructure during the current financial year is still less
than 5% of expected GDP. As a result, India's inability to set is fiscal
situation to rights will continue to result in perennial under-investment in
areas that could spur economic growth.
Budget documents show that the government's gross market borrowing in the
current fiscal year will be about 4.51 trillion rupees, a 23% increase on the
borrowing target cited in an interim budget in February. The government must
somehow manage its humungous borrowing needs without triggering inflation and
while retaining a soft interest rate regime that can spur domestic demand and
investment.
The government has missed a golden opportunity to stamp its authority and to
show a real concern for reform. It should have given direction to ensure
structural improvement in the economy, creating a sound foundation that could
have led to higher growth. Instead, it preferred to choose an easier path.
Note
1. See http://kunalsthoughts.weebly.com
Kunal Kumar Kundu, a former senior economist with a leading bilateral
chamber of commerce in India, now works with the Knowledge Service Division of
Infosys BPO Ltd. He has a Masters in Economics with specialization in
econometrics from the University of Calcutta. The author here is expressing his
personal views.
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