Budget 2013: All Sound and Fury?

March 31, 2013

By Debarshi Das

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The disingenuous numbers churned out by the Union Budgets often make observers throw up their hands. The recent editorial of the Economic and Political Weekly is a case in point.In spite of substantial shortfall of tax revenue from the target in the current financial year, the Budget proposes an optimistic 19% growth of tax revenue, and 33% growth of non-tax revenue for the next year. The targets are not likely to be met because neither the economy is growing at a commensurate rate, nor have major changes been proposed which can justify the projected rise. The surcharge on the income of the super-rich is not going to yield a windfall, given that a surprisingly small number of people has been captured in the tax net [1]. The EPW editorial concludes, “Budget 2013 continues with the tradition of presenting numbers that have no value other than what a short-sighted capital market wants to read into them. It is perhaps more than time to downgrade the importance accorded to this annual number-crunching exercise.”

Are these projections really all a tale of sound and fury, signifying nothing?  Or is there a pattern to the meaninglessness? The tale is definitely not told by a fool – not even the most vicious slanderer of the Finance Minister would spread such preposterous calumny, which raises the suspicion that perhaps revenue projections serve a purpose. Based on them, a fiscal deficit of 4.8% of the GDP is projected. To put 4.8% into perspective, in 2011-12 the fiscal deficit was 5.7%. A near one percent drop in fiscal deficit in two years is no mean feat. But, to reiterate, this compression depends on the high expected rise in revenue. If that does not come to pass, what would the government do? Perhaps what it did this year can give us a hint.

The former Finance Minister had projected 5.1% fiscal deficit for the current year. Tax shortfall, among other reasons, made 5.1% a distant dream [2]. As is well known, foreign investors feel extremely nervous about high fiscal deficits. Since “India, at the present juncture, does not have the choice between welcoming and spurning foreign investment” ( Budget speech of the Finance Minister in the parliament), ways were found to keep their sentiment unruffled. By foregoing plan expenditure of 90 thousand crore rupees, inter alia, fiscal deficit was reined in at 5.1%. Thus, if the projected revenue surge does not materialise, we may see another round of curtailing of government spending. Whether cutting expenditure at a time when output is decelerating at an alarming rate is right (growth rate of GDP has almost halved in two years), whether shrinking expenditure had had a role in the deceleration of GDP this year: these questions naturally arise. Moving away from them for the time being, one can reasonably conclude, conforming to foreign investors’ sentiments leads to limiting of government expenditure. What makes the shrinking of expenditure more certain is an over-enthusiastic projection of revenue. By committing to a small deficit, which is based on this over-estimation, the government ends up facing a choice between honouring the pre-committed small deficit and honouring the expenditure commitment. The constructed trade-off is then resolved by reneging on the latter. This choice placates the foreign investors, and it keeps the domestic business interests happy too. High government expenditure is an ideological anathema in the neo-liberal age, apart from causing practical problems. A large government occupies a big share of the economy, restricting the operation of short term gain-seeking business. Large government also requires large tax revenue, which the rich and the middle class are reluctant to pay.

 

The Economic Survey’s Diagnosis of the Slowdown

However, if the Economic Survey is to be believed government expenditure needed to be trimmed. The Survey had identified two broad reasons for the present economic slowdown: unhelpful global economy and domestic developments. On the latter it mentions the following sequence of events. After the 2008 global financial crisis, stimulus package was announced by the government. Due to supply side constraints stimulus-led consumption caused inflation. As a consequence the RBI raised rate of interest. High interest rate discouraged investment and growth. The Survey envisages that infrastructure and corporate investment would return us to high growth. If government expenditure had led to inflation then cutting government expenditure is compatible with the strategy to revive growth without inflation. So, the Survey prescribes, “[t]he situation warranted urgent steps to reduce government spending so as tocontain inflation.” Is this diagnosis correct?

One tends to agree that the expenditure which did not address supply-side constraints had the seeds of generating inflation. In an article on the 2011-12 Union Budget we expressed concern that not much is being done to remove the supply-side rigidities in agriculture: “a sensible policy to contain food price rise would attempt to remove the supply side hurdles in the agricultural sector, and not harp on reducing fiscal deficits.” However, how is corporate investment or infrastructure investment going to ease those constraints is a question the Survey does not answer. More worryingly, we note that not all the stimulus provided after 2008 encouraged consumption. A large part of it operated through tax incentive given to manufacturers and the infrastructure sector. Power, exports, housing, road construction were given tax reliefs (these belong to infrastructure sector, except exports where the government cannot be boosting consumption demand!). So, the first point to note is that, infrastructure investment was indeed given a boost. Secondly, private investment was provided incentives through cut in indirect taxes. In the words of Montek Singh Ahluwalia it was hoped, “the market forces would compel manufacturers in a competitive environment to bring down prices and pass on tax benefits to customers,” Thus, in these cases, the primary beneficiary of the stimulus was the industrialist, not the consumer. The consumer could get the benefit if it trickled down to her. In spite of the boosts given to infrastructure and corporate investment inflation did take place. That inflation is now being cited to cut government expenditure. As in much of contemporary Europe and the U.S., reduction in government expenditures is really a way to roll back whatever little of a welfare state exists in this country. Since the welfare state, when it exists, benefits the poor substantially more than the rich, rolling it back is a form of class warfare.

In sum, (a) Is it recognised that stimulus package entailed stimulating corporate and infrastructure investment? If yes, (b) Is it assumed that although rise in corporate and infrastructure investment after the package was inflationary, this time it will not be? Or, (c) Is it believed that without the boost to investment inflation would have been even higher, hence similar strategy should be adopted now? The Economic Survey did scant little to clarify.

 

Crying Wolf?

The unanswered questions throw more light on the Budget than what is said in the two hour-long speech. Widening current account deficit has been a key-word in the speech. While it is true that a current account deficit exists and is high, its magnitude seems to be reaching a plateau. India has always had current account deficits, except for a few years, in its history. All through these years the surplus in the capital account has been squaring the deficit in current account. In 2012-13 too, during the first six months for which data is available capital account surplus was marginally more than current account deficit, with the net result of the two being positive. In the past the net has been negative, resulting in depletion of foreign exchange reserve.

If the worry is that capital inflow from abroad may stop which would make the current account deficit hard to finance, there could be alternatives other than placating foreign capital and therefore credit rating agencies. Utilising the large foreign exchange reserve, generating greater tax revenue, imposing steeper tariff on gold and silver imports (11% of India’s imports) are a few proposals which can be put to use in the short run. Over the medium run, reducing dependence on crude oil imports (35%) through promotion of alternative energy, reducing dependence on imported capital goods (12%) could be planned. These can be ingredients of a worldview which imagines a path of development in the interest of the people.

However, painting a bleak picture can be useful. It gives non siquitur cue to “India, at the present juncture, does not have the choice between welcoming and spurning foreign investment.” Once foreign investments become the offer we cannot refuse, grounds for the safe passage of insurance and pension reform bills get prepared [3]. With retrospective effect, permission for higher foreign investment in multi-brand retail trade gets justified. “Never waste a crisis,” the adage was used to perfection in 1991. It might be even wiser to conjure up a crisis. How far will the machinations help revival of growth sadly remains doubtful.

As a disclaimer we must add, it goes without saying that growth cannot be the holy grail of a pro-people economic strategy. That the pundits, who harp on growth and sell Indian people’s sovereignty, are now failing on the only test they had set for themselves would have been amusing to watch – had it not brought hardship to the lives of many millions.

I thank Dipankar Basu for extensive comments and suggestions.

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[1] The purpose of announcement was to surprise, the Finance Minister has clarified. The super-rich who are not in 42,800 club will be shocked and shamed by the number itself. They will take heed, register their hidden incomes and help the government achieve the 19% tax surge.

[2] It is important to underline that room for raising resources through tax exists, but it’s not utlilised due to opposition from the rich and the middle class. The effective tax paid by many big corporate houses is very low. The personal income tax rates are generous, tax on finance is half-hearted. The government had to beat a retreat after the anti-avoidance rule proposed in the last Budget was fiercely opposed by the corporate sector. This Budget had proposed minimal restriction to stop the seedy flow of money routed through Mauritius. Even this is to be shelved due to clamour from financial market.

[3] The bills propose to increase the ceiling of foreign investment in these sectors from 26% to 49%, among other things.

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