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Business News/ Opinion / Online Views/  De-weeding the economy
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De-weeding the economy

Chidambaram’s eighth budget may be complimented not so much for what it has done but for what it has not done

The fiscal numbers will only gain relevance if and when the RBI cuts the policy rates and alters the stance of the monetary policy in line with that of the fiscal policy. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
The fiscal numbers will only gain relevance if and when the RBI cuts the policy rates and alters the stance of the monetary policy in line with that of the fiscal policy. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

The budget has to be seen as laying the micro foundations of the macroeconomy, rather than directly addressing the existing macroeconomic concerns.

P. Chidambaram’s eighth budget is not about the woods. It is not even about the trees. It is about the weeds that prolonged policy inaction had allowed to grow around all sectors of the economy. Wisely, even if wearily, Chidambaram has gone about de-weeding the economy all around.

As such, the budget for 2013-14 is not about numbers. Yes, the fiscal deficit, which seems to have become the be all and end-all of budgetary policy, is in line with what the Kelkar committee had suggested. But, that’s about it. The weakness of the fiscal numbers is obvious.

On expenditure, just like last year, the oil subsidy is expected to be halved as a percentage of gross domestic product (GDP), down from almost 1% of GDP in 2012-13 to 0.57% in 2013-14.

On revenue, the major resource mobilization has happened through the non-tax revenues. A major part of this comes from anticipated receipts from the one-time spectrum sale—almost 21,500 crore. An equal amount is budgeted to come from increasing the dividend from Reserve Bank of India (RBI) and nationalized banks. Taking account of these infirmities, the fiscal deficit number is highly suspect, as always.

But, at the moment, the fiscal deficit numbers don’t mean much. The fiscal numbers will only gain relevance if and when the RBI cuts the policy rates and alters the stance of the monetary policy in line with that of the fiscal policy. It will be then—19 March, to be precise—that the budget could generate the excitement much missed by the markets.

This budget is also not about a broad direction of economic policy or a fiscal stance. It is not an expansionary budget. Nor is there a three- or five-year fiscal consolidation path. Indeed, the rate of expenditure—total expenditure to GDP ratio—is marginally up from 14.3% in the revised estimates to 14.6% in the budget estimates for 2013-14.

Yet, the structure of expenditure has been changed in a manner that can facilitate growth. On expenditure, even as the level has been maintained as constant in real terms, the structure and composition of budgetary expenditure is geared towards generating a growth impulse and demand generation in rural areas. To a large extent, the kind of social spending that is being provided or is more likely than not to be less inflationary.

This expenditure allocation is being complemented by a public expenditure policy effort providing greater liquidity to the infrastructure sector which has become a binding constraint for growth, be it the infrastructure debt funds (IDF) that have been encouraged, the credit enhancement to be offered to India Infrastructure Finance Co. Ltd, or the infrastructure tax-free bond of 50,000 crore, and raising the corpus of rural infrastructure development fund to 20,000 crore.

Thus, a combination of two measures, propelling autonomous rural demand and proving liquidity for financing infrastructure and, thereby, reducing the capacity constraint, is the closest that the budget comes to addressing the situation of stagflation.

However, the other major structural constraints of a secular decline in the rate of savings and investment have not been addressed in any concerted manner. There are some promises of incentivizing greater household savings and protecting these from inflation or steps to increase retail participation in equity markets.

But, these are more than outweighed by the lack of a serious direction or a move ahead on reforms which could have signalled an intent may actually dampen investor sentiment, especially the foreign investor, which is likely to exacerbate the problems of financing the increasing current account deficit.

Even after recognizing that the current account deficit was a more serious issue than the fiscal deficit, it has been left completely unaddressed. Even after assuming benign crude oil prices, with exports under pressure, imported inflation inching up, the currency is likely to see not just volatility but a downward move.

At that point, the internal fiscal imbalances will get compounded by an external account imbalance. And this could spark a crisis.

While it is bound to be criticized for being a bits-and-pieces budget, Chidambaram may have thoughtfully positioned it as the budget of small things because that is the only way in which he could have navigated it without having to make any decisive choices in a situation where the choices are conflicting.

Instead of attempting to generate growth without fuelling inflation or being expansionary and running the risk of fiscal un-sustainability, or going in for fiscal consolidation and running the risk of growth slippage, he has walked carefully in a economy which is littered with land mines. In a sense, the budget may be complimented not so much for what it has done but for what it has not done.

In that sense, it is a quintessential Congress party budget—avoiding contradiction, ignoring conflict and charting a middle course.

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Published: 28 Feb 2013, 09:21 PM IST
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