A large part of acting finance minister Pranab Mukherjee’s interim budget speech covered the achievements of the previous four years in agriculture, social sectors, public sector performance, education and health. This was to be expected, given the need to lay before the country the achievements of the United Progressive Alliance (UPA) regime, with elections being so close. It is clear that the UPA has decided to use the pro-incumbency plank to fight the elections, and credit was taken for all the pro-poor programmes, notably the National Rural Employment Guarantee Scheme, the Bharat Nirman Yojana and the school education initiatives.
It was a confident speech. There was no apology for the worsening fiscal deficit. Rather, the explanation was that the increase in fiscal deficit was primarily due to increased revenue expenditure caused by additional food and fertilizer subsidies and increased salaries—all measures meant to put more money in the hands of the average citizen. Revenue shortfalls in the current year were justified on the basis of the need to give tax relief in the form of excise duty reductions to industry.
There was also confidence that the issues of fiscal deficit as well as fiscal stimulus could well be addressed by the new government, and the thinly veiled expectation that the present combination would be back to address these concerns. Mukherjee’s maturity and long experience were evident in the manner in which he adhered to constitutional propriety in not making ad hoc promises and interlocutory tax relief efforts. The announcement of a massive increase in defence expenditure was also a strong, confident message. It was, quite correctly, a vote-on-account statement, and the government must be complimented for adhering to constitutional and parliamentary propriety. And the 11-point agenda that was outlined for the new government has, in fact, points that any new government, whatever the hue, would need to adhere to.
Some of the numbers, however well hidden, are quite worrying. A revenue deficit of 4.4% of gross domestic product (GDP) against a target of 1% means that we are back to borrowing again for current expenditure in a major way—this number is worse than when the UPA started. The next year’s numbers at 4% do not appear to be much better. In two years, we would have borrowed an extra 7% of GDP at current prices to finance current expenditure—a horrendous number. This would squeeze about Rs7,000 crore away from productive expenditure at a time when funds are needed for public expenditure intervention. Coupled with the fact that there has been a relaxation in the ceiling on states’ debt by 0.5% of gross state domestic product, it shows that there will be substantial borrowing by the states and the Centre next year, squeezing out liquidity from the economy and making credit access more difficult and more expensive for private borrowers.
Unlike in the past, external commercial borrowing and foreign direct investment inflows will be constrained by the global slowdown, and one can foresee funding for new projects, particularly infrastructure projects, becoming tighter—not at all a good sign at a time when we want these initiatives to take off. There is little respite on the Plan side, as Plan expenditures have not risen significantly, and hence there is little indication that capital formation is accelerating. Lower revenues and the need for fiscal stimulus would necessarily result in the widening of the fiscal deficit and the spectre of inflation may not be far behind.
The speech started with the listing of seven measures that his predecessor had outlined as goals in the budget speech of 2004-05. Was this a bit of tongue-in-cheek criticism of his predecessor, for most of these seven goals have been missed? These include 7-8% GDP growth (it will not happen this year and the next), acceleration of fiscal consolidation (we are accelerating the other way), 100 days of employment guarantee (reports show that the best this scheme has achieved is about 47 days), universal health access (the less said of this achievement the better) and revitalizing agriculture (this has not happened). There was also no mention of reforms or of any measures that the government had announced even recently, including in insurance, banking and the financial sectors. The record of this government in respect of reforms in the economy has been rather poor, but there were no apologies for this, nor were there any promises for redressing this in the future. At the end of it, it was a political, pre-election budget, and the corporate sector as well as the average citizen would have been disappointed that there were no announcements that would have helped make the next few months look better. Perhaps the argument is that there has been a lot of fiscal stimulus given, and further rate cuts as well as liquidity enhancing measures can happen outside the budget, and hence there is no need to resort to ad hoc taxation measures now.
In short, just the kind of statement that one would have expected from the presenter of the budget.
S. Narayan is a former finance secretary and economic adviser to the prime minister. Comments are welcome at firstname.lastname@example.org