February 17, 2009 1:34:37 am
Industrial growth in the current year is likely to be around 4.5 per cent. This is well below the potential of the industrial sector. We must aim at a growth rate of 7 to 8 per cent in industry if we are to maintain high rate of growth of GDP and provide employment for our growing labour force in the years ahead… National income growth is likely to be in the range of 6 to 7 per cent… In the last four years,the present government introduced a number of schemes for the benefit of the weaker sections of the society,particularly in the rural areas. The sense of deja vu is strong. Those quotes are from budget speech for 1984-85,a year when Euromoney voted Pranab Mukherjee best FM.
Twenty-five years is a generation. Nonetheless,there are parallels and not just because both happen to be election years. In 1984,exports did well and agriculture was in a mess. 2009 switches the two sectors. There was too much of hype about this budget. Though legally and constitutionally,there was nothing (elections havent been announced) to prevent this from becoming a full-fledged budget,that would have been unethical.
There must have been pressures to tinker with tax rates. In 1984,we saw beginnings of a Laffer-curve argument on direct taxes. However,there was plenty of discretionary tinkering on indirect taxes. Since he hasnt done that this time and has treated February 16 as a vanilla vote-on-account,Pranab Mukherjee should be applauded,though he is unlikely to be voted best FM. He hasnt been FM in 2008-09. A group of ministers (GOM) has been FM spanning P. Chidambaram,Manmohan Singh and Pranab Mukherjee. In 1984,the budget speech ended with a quote from the Arthashastra,which is a political tract more than an economic one. Following the familiar storyline,this speech is also political,about a hand rocking the Indian growth cradle till 2007-08 that was then disrupted by an exogenous shock in September 2008.
This storyline leaves several questions unanswered. First,why didnt fiscal consolidation take place in good years? That would have left fiscal space for pink slips to be countered by subsidised distribution of pink chaddis and pink saris. Second,high growth resulted from cheap capital. Once interest rates were hiked and growth slowed,before September 2008,why werent pre-emptive measures introduced to handle job losses,instead of waiting for scary figures of 5 or 10 million job losses to surface?
Third,since the emphasis was on public expenditure and so-called flagship programmes,why were there no attempts to improve delivery,beyond what was done by third-party intervention through RTI applications and PILs? The Pradhan Mantri Gram Sadak Yojana shows how delivery can improve and the road programme also illustrates how public expenditure can meander and dry up (like Sarasvati) in the desert of leakage and high administrative costs.
Fourth,did one have to wait for identification of BPL households? It is now that the Planning Commission will set up Unique Identification Authority for subsidised public delivery,begging the question of how this integrates with the national identity card pushed by the home ministry. We knew that FRBM targets would go for a six. More than the fiscal deficit/GDP ratio of 6 per cent in 2008-09,the revenue deficit of 4.4 per cent is of concern. This has switched expenditure from investment to public consumption and more is contemplated through increased expenditure on flagship programmes in 2009-10. The PMs Economic Advisory Council expects consumption/GDP to increase by 4 per cent. Contrary to what the budget speech suggests,this isnt because extraordinary external circumstances led to extraordinary measures through two fiscal stimuli.
The bleeding occurred earlier and if the CSO is wrong about GDP growth of 7.1 per cent this year,deficit figures will be worse. They will continue to be worse in 2009-10,it being unlikely we will adhere to revenue deficit target of 4 per cent and fiscal deficit of 5.5 per cent. GDP growth and tax revenue have been over-estimated and some expenditure is not entirely budgeted for. With the 13th Finance Commission recommendations expected in October,state share in tax pool will probably increase. So will the state deficit as share of GDP,to perhaps 3.5 per cent,something already accepted for 2008-09.
Before diluting FRBM at the Centre and in the states,the incoming government should consider two questions. First,do we need these three channels of fund transfer to states: the Planning Commission,the Finance Commission,Central and centrally-sponsored schemes? If these are unified,we dont need the Planning Commission and the Finance Commission will also have a mandate that is not watered down,compared to what was expected in the Constitution. This argument also applies to devolution within states.
Second,as a corollary of the first question,we will break down artificial segmentation between plan and non-plan expenditure and even between revenue and capital expenditure.
Reactions to this vote-on-account have been adverse. But thats because people treated this as a budget and had unrealistic expectations,each lobbying for fiscal concessions. But once concessions and exemptions are granted for one sector (or category of individuals),its impossible to deny them to another. How is housing superior to education? Is physical capital formation superior to human capital formation? All concessions also have a revenue impact. Industry chambers dont notice incongruity between demand for concessions and insistence on deficit reduction. However,the UPA has never set much store by large-scale industry or the stock market. On account of votes,the vote-on-account recognises utility of the NREGA,SSA,MDMS,JNURM,Bharat Nirman and farmers debt relief. For the rest,the message seems to be that there have been two fiscal stimuli,not to speak of monetary policy,where additional loosening is certain. Before re-capitalising public sector banks,there is the moot point about whether the pendulum has swung too much in terms of insisting on NPAs,thereby making banks more risk-averse. Monetary policy transmission also works with a lag.
Paraphrased,reasonable agricultural growth,spliced with high procurement prices,has insulated rural India from external slowdown and NREGA has also provided a safety net. Those extraordinary measures are already in place. Beyond that,this is an annual general meeting in the vote-on-account sense. It isnt an extraordinary general meeting. Those who wanted fiscal concessions dont generally vote,or dont vote for us. We have already given them some duty cuts,Pay Commission and monetary policy. That should suffice. Notwithstanding vanilla vote-on-account,that political message is obvious and Pranab Mukherjee has handed it out,despite a rather boring speech.
The writer is a Delhi-based economist
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