Mumbai: In many ways, Thursday’s national budget—independent India’s 82nd—will be the toughest for finance minister P. Chidambaram, as he will be presenting it with one eye on the electorate and another on rating agencies, which have threatened to downgrade India.
This is Chidambaram’s eighth and the United Progressive Alliance government’s last budget before the nation goes to the polls next year. Traditionally, an election-eve budget tends to be a please-all accounting exercise, but in the backdrop of the high fiscal deficit and even higher current account deficit, slowing growth and persistently high retail inflation in the world’s second most populated nation, there is very little room for populist measures.
If one goes by the announcements Chidambaram has been making since he became finance minister in August, both at home and abroad, his commitment to fiscal responsibility is pretty evident and it is highly unlikely that he will deviate from this in the budget despite it being the last before the next general election. He has already set the target for fiscal deficit at 4.8% of India’s gross domestic product (GDP) in fiscal year 2014, down from the revised estimate of 5.3% in the current financial year. No target has been set for the current account deficit, but it needs to be pruned drastically (it was 5.4% of GDP in the second quarter of 2013) if the country does not want to be downgraded.
The current account deficit—the gap between domestic savings and investments—is being plugged by the flow of foreign money. Despite all constraints, the budget also needs to inject growth impulses in the economy as otherwise foreign money flow will dry up, pulling down the value of the local currency vis-à-vis the dollar and making imports more expensive.
By all accounts, it’s going to be a tightrope walk for Chidambaram. Before we dwell on the complexity of the task, let’s look at some of the facts of the budget exercise. Only one finance minister, Morarji Desai, has presented a greater number of budgets than Chidambaram—10 overall (and two on his birthday, 29 February). Desai and Chidambaram apart, only five of India’s 23 finance ministers have presented more than five budgets, an annual accounting exercise kicked off by then finance minister R.K. Shanmukham Chetty on 26 November 1947. They are C.D. Deshmukh, Manmohan Singh, Y.B. Chavan, Yashwant Sinha and Pranab Mukherjee. So far, India has seen 65 normal annual budgets, 12 interim budgets, and four mini-budgets, the first of which was presented by T.T. Krishnamachari in November 1956.
Chidambaram is known for his so-called dream budget in 1997 that slashed the maximum rate of income tax and removed the surcharge on corporate tax, and has innovative tax proposals such as the fringe benefit tax, the securities transactions tax and the banking cash transaction tax. But this time around, it is unlikely that he would tinker with tax policies, even though speculation is rife on a possible higher tax slab for ultra-rich Indians and the reintroduction of estate tax. If indeed he refrains from moving new tax proposals, how will the finance minister curb the fiscal deficit? The way to do so would be by curbing expenditure, something Chidambaram has been aggressively focusing on. In the first nine months of the current fiscal year, growth of Plan expenditure has been a mere 7% against an estimated 22%. This may shrink further to contain the fiscal deficit.
A phased reduction in fuel subsidies—following periodic revision in diesel prices—will create small room for the passage of the proposed food security law, the government’s flagship welfare programme for offering food subsidies to a large section of the population, and this could be the only populist measure in the election year budget. There is no scope for anything else. A timeline for the rollout of the goods and services tax (GST), the Direct Taxes Code (DTC), and the expansion of the direct cash transfer programme covering more welfare schemes are expected, but overall there is little scope for any radical measures in the budget.
Indeed, higher revenue generation through divestment of the government’s stake in public-sector undertakings, the sale of telecom spectrum, and dividend income from state-run entities will come in handy to reduce the fiscal deficit, but the biggest driver for containing the deficit is likely to be the squeeze on expenditure. One would love to see Chidambaram to address the structural issues and go for expenditure reforms to regain the government’s lost fiscal credibility, but this budget may not be the platform to do so. But, even in the absence of this, it can be a meaningful budget if Chidambaram can lay down a credible plan to contain the fiscal deficit at 4.2% of GDP in 2014 as this will bring down the government’s market borrowing programme and free up money for the private sector. Minor pruning of defence and welfare spending will be welcome, but capital spending should not be affected as it will deal a blow to the already flagging investment cycle.
Finally, promises on paper will not help. The biggest task for Chidambaram in the budget is restoration of the government’s credibility in containing the fiscal deficit, something that had eroded during the regime of his predecessor. If he is able to do so, one would expect the country’s central bank to reciprocate by paring the policy rate and releasing liquidity to bring back the growth momentum in Asia’s third largest economy.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is the author of A Bank for the Buck, a book on HDFC Bank.