As an economist,the question I have been asked many times in the past and will be asked in future is,What do you think about this budget? To make sense of the diverse and contradictory answers that the average person will receive from supposedly neutral experts,one has to know the various benchmarks used. What were the expectations against which the budget was assessed? These are related primarily to stabilising the macro-economic situation and secondarily to boosting investment.
Let me start,therefore,by defining my benchmark. The rate of growth of the Indian economy has been on a downtrend over the last three years to reach a projected 5 per cent in the current year. In this period,the current account deficit reached 2.8 per cent and then jumped to an unprecedented 4.2 per cent of GDP,and investment growth halved and then halved again. At the same time,inflation as measured by different indicators remained stubbornly high. Consequently,the rating agencies threatened to reduce Indias global rating to junk status. The political establishment,including the government,took serious note of this potential crisis in the last quarter of 2012 and initiated policy action to free the administered prices of petroleum products and increase FDI limits in aviation and retail. This was a good start and helped to reverse the extreme pessimism that had gripped domestic and international investors. It was phase one of an operation to retrieve the situation and reverse the trends in investment and growth.
I saw the budget as phase two of the process,whose focus was on reversing fiscal trends as a critical input in overall macro-economic stabilisation. The test would be to see if the finance minister was able to deliver on his long-term fiscal deficit strategy and the targets of 5.3 per cent and 4.8 per cent for the years 2012-13 and 2013-14,respectively,as well as reverse the trend of rising subsidies and current expenditures and transfers. Tested against this benchmark,the budget has done well (5.2 per cent and 4.8 per cent),with a few caveats. Much of the increase in the fiscal deficit in 2009-10 (the high point) was due to a jump in subsidies. Returning subsidies to 2 per cent of GDP,where they had settled in 2007-08,was therefore an essential element of fiscal stabilisation. A projected 10 per cent decline in the subsidy bill is reassuring,even if this decline is exaggerated. However,total expenditures are projected to increase by about 16 per cent next year,above the projected GDP growth of 13.5 per cent,which,in my view,is optimistic. Thus,current expenditures net of subsidies will increase as a proportion of GDP. This uptrend is a little worrying,as the revenue deficit (RD) will only decline by about 0.5 per cent of GDP,even under the optimistic growth projection. As the RD is approximately equal to the governments investment-saving gap,the impact on the current account deficit (0.5 per cent) is not sufficient to bring it below 3.6 per cent or so. On the other hand,capital expenditures have increased by 27 per cent. Thus,this reduction has been achieved while raising government investment,which should have a positive effect on overall investment.
There are also some measures in the budget to increase private investment and savings. The introduction of an investment allowance for large investors has,however,been accompanied by a rise in surcharges on corporate profits. This fiscal twist (positive and negative) could,in principle,bring forward and accelerate private investment expenditures. But this will only happen if investors believe the promise that the rise in the surcharge is temporary. Credibility is the key to its success. There was also some expectation that explicit administrative and procedural measures would be taken to reverse what has been perceived as a creeping return to permit-inspector raj in the revenue department,that is,in the Central Board of Direct Taxes and Central Board of Excise and Customs. The budget did not,unfortunately,give a convincing demonstration of
There is an underlying concern that many in the UPA and in other parties do not realise the seriousness of the situation,where the rate of growth of GDPmp (GDP at market prices) is likely to be an abysmal 3.5 per cent in 2012-13,and are again becoming complacent that the measures already taken will propel us back to 6.5 per cent and then to 8 per cent growth. In my view,this will not happen without further policy,regulatory and institutional reforms. I look forward to phase three of the reform process,which can make this return to sustained high growth more likely.
The writer is non-resident senior fellow,Brookings,and former chief economic advisor,Government of India