Deficit vs growth con­scious­ness

The Pak Banker - - OPINION - V. Anan­tha Nageswaran

ACOUPLE of days ago, I had posted an ar­ti­cle in my blog as to how I would eval­u­ate the In­dian bud­get, and the bud­get de­liv­ered by the fi­nance min­is­ter on Mon­day in par­tic­u­lar. As I went through the bud­get speech doc­u­ment (much longer than last year's) and all the re­lated doc­u­ments, I found that the bud­get ticked most of the boxes. Yet, one could not avoid the im­pres­sion that the bud­get had failed to pro­vide a vi­tal spark that might have kin­dled an­i­mal spir­its in the coun­try.

The bud­get ticks the boxes on fis­cal, rev­enue and pri­mary deficit pa­ram­e­ters. It has done bet­ter on the rev­enue deficit tar­get (2.5% vs 2.8%) and ef­fec­tive rev­enue deficit tar­get (1.5% vs 2%). Not only that, it projects an ac­cel­er­ated de­cline in the ef­fec­tive rev­enue deficit, reach­ing 0% by 2018-19. So far, so good. At the same time, the fis­cal deficit is com­ing down more slowly only to 3% of GDP. In other words, the medium-term fis­cal pol­icy state­ment en­vis­ages a dras­tic re­bal­anc­ing of ex­pen­di­ture to­wards cap­i­tal from rev­enue items. That is op­ti­mistic. For ex­am­ple, for 2015-16, the govern­ment ex­pected rev­enue ex­pen­di­ture to go up by 5%. In the re­vised es­ti­mates, it is pro­jected to rise by 6%. Cap­i­tal ex­pen­di­ture is ex­pected to go up by 14.2%. But, it is now ex­pected to rise only by 12.9%.

The achieve­ment is still a good one but it only high­lights the dif­fi­culty of achiev­ing an ef­fec­tive rev­enue deficit of 0% by 2018-19.

Hence, it is just as well that the fi­nance min­is­ter sig­nalled a re­view of the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment (FRBM) frame­work with the com­ple­tion of a decade un­der the FRBM rules marked by fis­cal ir­re­spon­si­bil­ity on the part of two United Pro­gres­sive Al­liance ad­min­is­tra­tions.

This govern­ment in­her­ited a bad fis­cal sit­u­a­tion. True bud­get deficit was more than 6% of GDP when it took of­fice. Hence, to achieve a deficit ra­tio of 3.5% in the cur­rent fis­cal year is no mean achieve­ment. But, it has paid a price for it. It has achieved a pro-cycli­cal fis­cal con­sol­i­da­tion in the face of fal­ter­ing global growth and two failed mon­soons.

When the Cen­tral Sta­tis­tics Of­fice (CSO) told us a few weeks ago that nom­i­nal gross do­mes­tic prod­uct (GDP) growth would be 8.6% for the year end­ing March 2016, it also re­vealed that the nom­i­nal growth in net indi- rect taxes (in­di­rect taxes less sub­si­dies) would be close to 30%. That gave us an inkling that the govern­ment would not fall too short of its deficit tar­get of 3.9%. In the end, it didn't.

We can see that in the ex­cise duty col­lec­tions. Against the ac­tual ex­cise duty re­ceipt of Rs.188,128 crore in 2014-15, the govern­ment now ex­pects to col­lect Rs.283,353 crore in 2015-16. It is now pro­jected to in­crease to Rs.317,860 crore in the com­ing fis­cal year.

Now, clearly, this is a damp­ener for eco­nomic ac­tiv­ity-both for sup­ply and de­mand. The govern­ment did not pass on the oil price wind­fall to In­dian con­sumers but kept most of it to it­self by rais­ing du­ties on pe­tro­leum prod­ucts. It is no bad thing from an en­vi­ron­men­tal per­spec­tive but the price had been paid in terms of eco­nomic growth. That is one of the rea­sons why the nom­i­nal GDP growth tar­get of 11.5% as­sumed in the bud­get for 2015-16 had turned out to be too high.

The govern­ment now has as­sumed GDP at cur­rent prices to grow at a rate of 11% for 2016-17, ris­ing to 12% in 2017-18 and then to 13% in 2018-19. In the cur­rent global en­vi­ron­ment, th­ese are stretch tar­gets. There is a sta­tis­ti­cal chal­lenge too. The CSO will have to in­vest time, ef­fort and money in de­vel­op­ing a re­li­able GDP de­fla­tor price in­dex for In­dia that re­flects the dom­i­nance of the ser­vices sec­tor in­stead of us­ing mostly Whole­sale Price In­dex prox­ies that might be un­der­stat­ing nom­i­nal GDP growth and, con­versely, over­stat­ing real GDP growth.

The govern­ment seems to be bet­ting on in­ter­est rate re­duc­tion to drive growth. It has there­fore striven to de­liver re­spon­si­ble fis­cal pa­ram­e­ters so that the Re­serve Bank of In­dia could cut rates more ag­gres­sively. It has also kept an eye on the bond mar­ket.

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