Much was expected from the Interim Budget for 2009-10 given the deep economic crisis facing the Indian economy. These expectations were belied. The FM took refuge behind constitutional propriety for not announcing any new policy initiatives. Thus, the Interim Budget turned out to be a damp squib for the lay public even though for the ruling party it became the perfect oppor-tunity to blow its trumpet for the coming elections.
Even though the Budget is about the coming year and the direction that the policies will give to the economy or the problems that the policies will resolve, the Interim Budget was mostly about the past achievements of the UPA Government. It was a clean balance-sheet of the governments performance with only the achievements listed and the negatives completely missing.
The most important negatives and the crisis brewing today pertain to the current year (2008-09) and were only superficially presented in the FMs speech. However, a deeper analysis of the budgetary figures for the current year and the projection for the year ahead reveals a more correct picture than the FM was willing to reveal.
Budgetary Picture for 2008-09
Figures reveal that the calculus of the Budget was completely off the mark for 2008-09. Analysts had suggested last year after the Budget that it had been drawn up on too rosy a picture of the economy (for instance, this authors article in these columns on March 1, 2008). Tax revenue, which was expected to rise by 15 per cent, has only risen by 5.5 per cent. Even this is an overestimate given the current reports of a huge downturn in production and imports in the last six months. Non-Plan expenditure was expected not to rise but has indeed risen by 21 per cent. Actually the rise is in the revenue account only so that the per cent rise is 33 per cent. Critics predicted that this would happen given the Pay Commission implemen-tation, farm loan waiver and the rise in the subsidies bill. Plan expenditures were expected to rise by 19 per cent but are higher by 37 per cent. However, the Central Plan expenditures were supposed to rise by 17 per cent but are up by 21per cent. As happens every year, the contribution of the public enterprises (IEBR) is less than planned.
Given the rise in expenditures and shortfall in revenues, naturally the deficit is much larger than predicted. The revenue deficit was expected to be 1.1 per cent of the GDP but is a whopping 4.4 per cent. The fiscal deficit was expected to be 2.5 per cent of the GDP but is turning out to be six per cent. However, as suggested, the revenue is likely to be even less than what the Budget is saying it will be so that the deficits in all likelihood will be even larger.
Of course, the governments claim is that the stimulus packages are the cause of the steep rise in the deficits. This is only partly true and, as the above argument points out, most of the effect is due to the miscalculations. Excise duties in 2008-09 were expected to rise by eight per cent but are going to fall by 16 per cent. The excise duty cut on petro goods in June by Rs 1 per litre and of four per cent across-the-board cut in December would have accounted for some shortfall (perhaps about 15 per cent) over the expected figure and not a 24 per cent turnaround as has happened. This implies that in 2008-09 the output of manufactured goods is expected to fall.
According to the statement laid in the House in terms of the requirement of the FRBM Act, tax revenue was growing by 25.3 per cent in the first half of the year and it fell by 11.6 per cent in the third quarter. This is partly reflective of the tax cut announced but it is indicative of a decline in production in 2008-09. This is also borne out by reports of the closing down of industries and retrenchment of workers. The fall in the prices of many commodities is indicative not only of global trends but also of the falling demand in the country.
It defies logic that the government continues to harp on a 7.1 per cent rate of growth for the year 2008-09 when all indications even in the Budget are that there is a sharp deceleration of growth in the latter half of the year. The statement does mention that these growth figures are based on the CSOs (Central Statistical Organisations) quick and advance estimates which are provisional and based on projecting from the past trend. Thus, they can be manipulated whichever way one wishes to and currently the political authority wishes to show that the growth is robustperhaps with an eye on its propaganda value for the coming elections. But such manipulation will play (and perhaps has already played) havoc with the budgetary calculus.
In brief, the Budget reveals that the calculus for the current year (2008-09) has gone considerably haywire. But what about the next year since the Budgets are more about the coming year than the year that has just ended. Usually, when the figures for the current year are in error or deliberately mani-pulated to show a good performance, the next years figures turn out to be even more in error. What is the picture for 2009-10 presented in the Budget?
Budgetary Calculus for 2009-10
The Budget for 2009-10 is based on the assumption that the past trends would continue since no policy changes have been made. The Finance Minister insisted that given the constitutional requirement he could not have done otherwise. It is clear that he has not done so in spite of the critical condition of the economy and the figures of 2009-10 confirm this as discussed below.
Overall the economy is assumed to grow by 10.97 per cent (see Notes of page 1 of Budget at a Glance) and it is assumed that the real growth will be seven per cent as in the current year and prices will rise by four per cent (FRBM Statement, p. 32). Thus, the growth rate of the economy is assumed to be the same as the average assumed in 2008-09. How valid is this assumption? Since the current trend is one of economic decline, the use of the average to project for the next year is incorrect. There are two errors in the figures.
First, given the current declining trends in the economy, the rate of growth of the economy will be less than projected so that the GDP will turn out to be less than assumed. Secondly, because the rate of growth for the next year will also be less than assumed, the GDP for 2009-10 will be much lower than assumed. Hence revenues at current rates will turn out to be much less than assumed in the Budget.
There are indications in the Budget that the rate of growth would be less. Excise and customs revenue is expected to rise only by two per cent. Since rates are assumed to remain unchanged, this would imply a two per cent nominal growth in the economy rather than the 10.97 per cent. Corrected for a four per cent rate of inflation, this would mean a decline in the economy by two per cent. How then will the direct tax collection increase by the estimated 10 per cent? A bulk of this increase is expected to come from corporation tax. But corporate profits are under pressure and declining rapidly; so if anything, corporation tax collection should also decline or perhaps stagnate.
Non-Plan expenditure is expected to rise by eight per cent on account of a sharp increase in interest payments (due to the rapidly rising borrowings) and defence expenditures and salaries. It is partly offset by a fall in subsidies (especially on petro-goods whose prices have fallen). Plan expenditure is slated to remain unchanged.
Thus, while the revenue receipts are shown to rise due to the assumed continued high growth, expenditures are shown to be held in check (especially on Plan account) so that the revenue deficit and the fiscal deficit are supposed to fall.
Clearly, if the rates of growth turn out to be much lower than assumed (as all indications suggest) the figures for both 2008-09 and 2009-10 will turn out to be incorrect.
Global Downturn and Need for Quick Action
Further, given the sharp downturn indicated by indirect tax collections, there was need for immediate action. Given the crisis proportions of the current situation, constitutional propriety could have been waived in consultation with the Opposition. The global situation is nothing like what has been faced in the last 80 years and government interventions are not working because they are turning out to be too little too late (see a detailed description of this in Kumar, 2009, in the journal Accountancy Business and the Public Interest Vol. 8, No. 1, February 3, 2009, at the website: http://visar.csustan.edu/aaba/aabajourvol8-no1.html).
It is curious that while other governments are admitting the slowdown and recession and still doing too little (as is said, they are behind the curve) the Indian Government is not even admitting the problem and therefore not responding with the vigour that is needed. Even if the government did not wish to take policy decisions, it could have accelerated Plan expenditures since the Plan is already approved. This would not have called for any fresh policy decisions. If the deficit would have turned out to be larger, in the current situation this was a lesser evil than inaction. Anyway the FRBM has been thrown out of the window.
It is strange that while the government was trying to stimulate the economy through packages, most Ministries spent less under the Plan head than was budgeted for. Less was spent by the Ministries of Civil Aviation (25 per cent), Coal (25 per cent) Communication (nine per cent), Power and HRD (10 per cent each), Shipping etc. (20 per cent) and Steel (14 per cent). The big increases came from Ministries of Petroleum (23 per cent), Rural Development (50 per cent), Textiles (60 per cent) and Urban Development (33 per cent).
It is correct that the rise in the fiscal deficit is itself a stimulus to the economy so that a 3.5 per cent rise in this could be seen to be a stimulus to the economy. However, since a substantial amount of this is in the form of subsidies and interest payment, which are transfers, they would not stimulate the economy but actually reduce the effect of the deficit.
This stimulus is likely to be inadequate for another reason. Corporate sector profits are falling and therefore its investment and savings rate would fall, and these were the drivers of growth in the last six years. That is why stepping up of the Plan expenditures and capital expenditures was called for.
Nehruvian Strains of the Budget
The ruling party has suddenly discovered the farmers as heroes. Why have they been ignored all these years when they were committing suicides in growing numbers? But not much is being invested in agriculture for all this talk of favouring them. The figure is presented not as a share of the GDP but of the agricultural GDP and the latter is a declining component of the GDP.
The PSUs have come in for praise while till the other day they were the whipping boys and fit only for disinvestment or privatisation. The other day the Congress-I also praised our public sector banks for staying away from the toxic assets that the private banks and foreign banks and especially abroad had indulged in and created the crisis (see the article referred to above).
Expenditures on social sectors and on the rural employment guarantee scheme are also being lauded. Just till the other day these were seen to be the millstone around the nations neck. It was said that the country lacks the resources to implement these schemes fully. With the decline in the private sector, seen to be the engine of growth till recently, obviously the private sector and the government have to depend on the public sector. Clearly adversity leads to big changes in perceptions.
However, it is strange to see sections in the FMs speech talking of financial sector reforms and liberalisation of conditions for FDI to come into the country. Contradictions in the strategy continue.
The budgetary calculus has been undone by the evolving global economic crisis and has caught the government in a pincer. It cannot admit a bad situation just when the elections are round the corner. Thus, the budgetary calculus has been distorted for 2008-09 and 2009-10 and inaction considered desirable. Who will be held accountable for this tomorrow just as who is being held accountable for the current crisis which is a result of the policies launched in 1991? n