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Business News/ Opinion / Online Views/  The expenditure switch in Budget 2015 is more good luck than effort
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The expenditure switch in Budget 2015 is more good luck than effort

The critical dependence on depressed oil prices could shake public finances, should global winds blow in the other direction at some point

To put it in a nutshell, the savings from the decline in energy prices enables the partial effort at expenditure switching. (To put it in a nutshell, the savings from the decline in energy prices enables the partial effort at expenditure switching. )Premium
To put it in a nutshell, the savings from the decline in energy prices enables the partial effort at expenditure switching.
(To put it in a nutshell, the savings from the decline in energy prices enables the partial effort at expenditure switching. )

A key expectation from this year’s budget was an expenditure switch from current to capital spending or towards productive public spending. This essentially meant the axe had to fall upon subsidies, which is an optional expense as opposed to other components of government expenditure that are non-discretionary and rigid in nature such as interest payments, salaries and pensions. The budget attempts this to an extent, but falls short of going the whole way.

As a corollary, the fiscal effort to stimulate growth via increased public spending is modest, notwithstanding the 30 basis points (bps) breach in the deficit target for 2015-16—from 3.6% of GDP to 3.9%)—laid out in the consolidation path drawn by the Kelkar panel in September 2012. One basis point is one-hundredth of a percentage point.

To put it in a nutshell, the savings from the decline in energy prices enables the partial effort at expenditure switching: A 50% contraction in petroleum subsidy provision over last year releases about 303 billion and brings down the overall subsidy expenditure to 1.6% of GDP as against 2% of GDP in 2014-15. But, subsidy outlays for food and fertilizers actually increase by 1.4% 2.8%, an aggregate 37.4 billion, while continued provision of 300 billion under the petroleum sub-head indicates continuation of subsidized LPG and kerosene.

So real reforms, or a nutrient-based subsidy regime for urea, phase-out of LPG and kerosene subsidies, etc., remain to be done, while the correction in overall subsidy outflows comes mainly from the steep fall in global oil prices.

This is more good fortune than fiscal effort. Still, utilizing one’s luck to promote growth is a good thing.

The planned rise in capital spending or public investment is about 34% over last year’s revised budget estimates, or 342 billion (plan expenditure), but this massive uplift is actually a humble one, as Manas Chakravarty notes in his Mint column of 1 March. It follows a virtual standstill in capital expenditures in 2014-15—plan capital expenditure, at 1,011 billion, increased just by 4.6 billion over the previous year or 2013-14—due to intense fiscal contraction with spending cuts falling upon this productive item. As percentage share of GDP, total capital expenditure is just 20 bps higher in 2015-16 compared with last year.

Looking at the broad composition of public expenditures, which gives us a sense of the quality of the government’s balance sheet adjustments, this is now evenly distributed between subsidies and capital spending in relation to the economic base as total expenses on both categories now stand at 1.6% of GDP. To provide an evolutionary perspective on the expenditure switch or quality improvements in government spending, this distribution compares with 2% and 2.2% of GDP spent on subsidies in the last two years (2014-15 and 2013-14) and 1.4 and 1.5% of GDP on capital investments. A gradual pace of reform, and one immensely facilitated by crisis (as in 2013) and good luck (as in 2014), one would say!

The critical contingency upon depressed oil prices could shake public finances should global winds blow in the other direction at some point. Although the government is likely to sustain the deregulation of retail prices of petroleum products like petrol and diesel, financial weakening could occur from the revenue side. This is because of the excise duties that fetch the government handsome revenues at current crude oil price levels, but which are also a cushion to start rolling back if global crude prices inch beyond $70-75 a barrel, as junior finance minister Jayant Sinha explained in a recent interview. In that sense, the expenditure-switch is dependent upon continuation of good luck to an extent; in the event of reversal, capital expenditures may have to be cut once again.

Renu Kohli is a New Delhi-based macroeconomist.

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Published: 03 Mar 2015, 05:20 PM IST
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