It took less than a couple of hours for the stock market to figure out that the projected improvement in the fiscal deficit to 4.6% of gross domestic product (GDP) is unlikely to happen. The Sensex ended the day lower than where it was at the start of the budget speech. The bond markets, too, after an initial rally prompted by the government borrowing figure being lower than expected, gave back some of its gains.
What is in the numbers that is so unsettling? First, consider that growth in total expenditure is projected at 3.4% for 2011-12, compared with 18.7% growth in 2010-11. Since the budget assumes that nominal GDP will increase by 14% in 2011-12, growth in government expenditure is far below the increase in nominal GDP. Given the government’s track record, curbing expenditure to such an extent is extremely unlikely.
How has the government been able to show such a low level of expenditure? The finance minister says that subsidies in 2011-12 will be lower by Rs 20,583 crore than the amount spent on subsidies in the current fiscal. Though oil prices are high, the petroleum subsidy is lower by almost Rs 15,000 crore. Although the government plans to introduce a right to food Bill, it has kept the food subsidy figure flat. Even the fertilizer subsidy is budgeted at a lower level. Apart from subsidies, guess how much this government for the ‘aam aadmi’ is spending under the head “social security and welfare”? Budgeted expenditure is Rs 3,401 crore in 2011-12, while they spent Rs 18,427 crore this fiscal. Either the ‘aam aadmi’ tag is hot air, or the numbers are bound to go up.
What about capital expenditure? The outlay for total capital expenditure in 2011-12 is lower than in 2010-11, but the finance minister says that part of the revenue expenditure is for the creation of capital assets. Taking that into account and after adjusting for capital expenditure on defence, the rate of growth in capital expenditure works out to 23.5%, which is good. Unfortunately, the budget does not give the amount of grants for creation of capital assets in 2009-10, so we do not know what the growth rate has been this fiscal and whether the projected growth rate is achievable. Interestingly, the increase in total capital expenditure, without taking the grants for creation of capital assets into consideration, was a huge 44.6% in 2010-11. By that reckoning, although the 23.5% growth looks impressive, it’s actually quite a deceleration from government capital expenditure in the current fiscal.
Consider also that, in spite of such a huge growth in government capital expenditure in the current fiscal, the trend on gross fixed capital formation this year hasn’t been encouraging. According to the third quarter GDP numbers, growth in gross fixed capital formation has been decelerating steadily—it was 25.7% in the first quarter, 17.8% in the second and a mere 6% in the third quarter.
On the receipts front, the projection of growth in tax revenue for 2011-12 is 17.9%, well below this fiscal year’s growth of 23.5%. With a nominal GDP growth of 14%, that should be achievable.
The rally in the markets on Monday was, therefore, a relief rally, relief that the finance minister has, at least, done no harm. As the heroic assumptions behind the budget projections for 2011-12 sink in, even the relief may fade away.
The government says that GDP growth next fiscal is going to be around 9%. This fiscal, growth is expected to be around 8.6%. The Reserve Bank of India (RBI) has been saying, ad nauseam, that demand conditions are so strong that interest rates need to be raised. But if the government says that growth next year will be 9%, doesn’t it mean that the interest rate hikes are not working and that monetary policy needs to get even more restrictive in future? By insisting that growth will be 9%, the government may be making things even more difficult for RBI.