The Bud­get­ing Trick

In­dia’s re­cent fis­cal bud­get ap­pears to be prac­ti­cal and re­al­is­tic but not with­out a few caveats.

Southasia - - Contents - By Si­jal Fawad

Can In­dia’s re­cent fis­cal bud­get ful­fill its eco­nomic ob­jec­tives?

The moot point over In­dia’s 2013-14 bud­get stems not just from the bud­get it­self but also the de­cel­er­a­tion of the coun­try’s phe­nom­e­nal rate of growth over the past few years, which has made the coun­try’s fis­cal dy­nam­ics even more crit­i­cal. The high­light of the re­cent bud­get was a 16 per­cent in­crease in pub­lic ex­pen­di­ture rel­a­tive to the pre­vi­ous year – a con­tro­ver­sial move at a time when In­dia is try­ing hard to keep its fis­cal deficit in check.

And yet, the coun­try needs to prop up GDP growth num­bers too, for which im­pe­tus from pub­lic spend­ing is much needed. For FY2013-14, the govern­ment projects an in­crease of 6.1-6.7 per­cent in the coun­try’s GDP, which is higher than the 5 per- cent seen for the cur­rent fis­cal year, but still short of the pre­vi­ously high growth fig­ures achieved be­fore the global fi­nan­cial cri­sis.

That this is the last bud­get be­fore the next elec­tions makes it even more crit­i­cal for the cur­rent rul­ing party. That ex­plains why this time job cre­ation ranks high on the govern­ment’s agenda with a strong fo­cus on growth in cer­tain key sec­tors. Th­ese in­clude in­for­ma­tion tech­nol­ogy (IT), in­fra­struc­ture, ed­u­ca­tion, do­mes­tic man­u­fac­tur­ing, etc. Re­duc­tions in sub­si­dies, in par­tic­u­lar oil and fer­til­izer, with the sub­sidy bill limited to be­low 2 per­cent of the coun­try’s GDP, ap­pear to be an at­tempt to keep the fis­cal deficit in check. How­ever, an­a­lysts are cog­nizant of how slip­pages usu­ally take place when it comes to the ac­tual ex­pen­di­ture on sub­si­dies.

At the same time, the Food Se­cu­rity Act raises the bar and be­comes a shin­ing ex­am­ple of a pop­ulist mea­sure from the govern­ment. Rs900 bil­lion has al­ready been al­lo­cated to food sub­si­dies 2013-14, rel­a­tive to a re­vised es­ti­mate of Rs850 bil­lion spent in 2012-13. Be­sides this, so­cial spend­ing in other ar­eas will also re­ceive a boost with the Min­istry of Health and Fam­ily Wel­fare re­ceiv­ing 40 per­cent more than what was al­lo­cated for it in the pre­vi­ous year, as well as a greater out­lay for the Min­istry of Hu­man Re­source De­vel­op­ment.

In light of th­ese pol­icy ini­tia-

tives, to say that the 2013/14 bud­get is de­void of any pop­ulism would be a mis­lead­ing state­ment. The fact that govern­ment spend­ing it­self will be in­creased – as has tra­di­tion­ally been the case with most pre-elec­tion bud­gets – in­di­cates the pres­ence of po­lit­i­cal mo­tives. By tar­get­ing the ru­ral poor through food sub­si­dies, so­cial wel­fare poli­cies and other de­vel­op­men­tal projects, the Congress is suc­cess­fully tar­get­ing its key vote bank. In ad­di­tion, the bud­get also ad­dresses re­cent pub­lic out­cries over women’s se­cu­rity in the coun­try through a $185 mil­lion fund de­voted to an all-women pub­lic sec­tor bank, pub­lic cam­paigns about vi­o­lence against women and sup­port for rape vic­tims.

Sim­i­larly, the de­fense bud­get war­rants at­ten­tion as a hike of a rel­a­tively mod­est 5 per­cent was noted, rel­a­tive to an in­crease of 17 per­cent in the pre­vi­ous bud­get. Pegged at $40 bil­lion, the bud­geted amount is per­ceived as be­ing mea­ger by an­a­lysts and com­men­ta­tors. “Within the In­dian con­text, it means that In­dia’s de­fense ex­pen­di­ture for 2013-14 will be at the low­est point in three decades. This should be enough only to meet the ex­pen­di­ture on ac­count of pay and al­lowances and main­te­nance of the weapons sys­tems,” said Ra­jeev Sharma, a New Delhi-based strate­gic af­fairs an­a­lyst, in an ar­ti­cle in the Global Times.

Given that In­dian de­fense forces are in dire need of mod­ern­iza­tion, al­le­ga­tions of pop­ulist mo­tives be­hind the rel­a­tively nom­i­nal in­crease in the de­fense bud­get have made waves. In or­der to make room for ex­pen­di­ture for the afore­men­tioned so­cial wel­fare schemes, the de­fense bud­get bore the brunt. For a coun­try with a pop­u­la­tion of nearly 1.2 bil­lion peo­ple, greater em­pha­sis on national se­cu­rity has to be re­al­ized. Pak­istan, In­dia’s long-term ri­val, al­lo­cates a greater per­cent­age of its GDP to de­fense spend­ing than In­dia, mak­ing many ques­tion the dis­cre­tion of the govern­ment in con­tin­u­ing to strip the armed forces of their needed rev­enues at a time when the coun­try’s ag­ing mil­i­tary equip­ment needs to be up­graded and mod­ern­ized.

As if in­ter­nal fis­cal is­sues weren’t enough, In­dia’s ex­ter­nal debt sit­u­a­tion also war­rants con­sid­er­able at­ten­tion with trade deficit prob­lems adding to the prob­lems. For the third quar­ter of 2012, ex­ter­nal debt rose to $365 bil­lion. Cri­sis in the Eu­ro­zone and stag­nant growth in de­vel­oped economies has cer­tainly taken a toll on In­dia’s ex­ports, lead­ing to a trade deficit that has to be funded by for­eign cur­rency debt. To ef­fec­tively ad­dress the ex­ter­nal debt prob­lem, In­dia will have to un­der­take poli­cies that can help keep the trade deficit in check. Im­prov­ing ex­port com­pet­i­tive­ness, curb­ing im­port de­mand and at­tract­ing for­eign di­rect in­vest­ment in var­i­ous projects are pre­scribed mea­sures for re­duc­ing the trade deficit. Be­sides, ex­ter­nal com­mer­cial bor­row­ings and short-term debt have also con­trib­uted to the sig­nif­i­cant rise in ex­ter­nal bor­row­ings, war­rant­ing the govern­ment to take mea­sures to curb th­ese.

Holis­ti­cally, In­dia’s bud­get has been largely dubbed as be­ing re­al­is­tic and bal­anced but not with­out a few caveats. It tar­gets a mod­est drop in fis­cal deficit from 5.2 per­cent of GDP in 2012-13 to 4.8 per­cent in 2013-14, which seems rea­son­able given the macroe­co­nomic prob­lems of sub­dued GDP growth and bear­ing in mind that elec­tions are around the cor­ner. How­ever, the growth rate tar­get may be­come a tad hard to reach and there’s like­li­hood of the sub­si­dies bill ex­ceed­ing the tar­geted amount too. Yet, the bud­get seems as re­al­is­tic and prac­ti­cal as one could ex­pect a pre-elec­tion bud­get to be.

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