Opinion Budget numbers on growth

Bibek Debroy<br> One of the problems with budget figures is one never directly obtains government projections about GDP.

February 17, 2009 12:09 PM IST First published on: Feb 17, 2009 at 12:09 PM IST

One of the problems with budget figures is one never directly obtains government projections about GDP. They have to be worked backwards from deficit figures. In 2008-09,fiscal deficit is Rs 3,26,515 crores and this is 6% of GDP. This gives a 2008-09 GDP figure of Rs 54,41,917 crores.

On 9th February 2009,CSO came out with advance estimates of GDP in 2008-09. At market prices,these show a GDP in 2008-09 of Rs 54,26,277 crores. There is a minor anomaly with the budget figure. More to the point,CSO expected real GDP growth of 7.1% in 2008-09 and nominal GDP growth of 15.5%. Prime Minister’s Economic Advisory Council also expects real growth in 2008-09 to be 7.1%.

However,everyone outside the government seems to think 7.1% is too high. In the first half of the year,the economy grew by 7.5%. For 7.1% to be possible,growth in second half will have to be at least 6.5%. The consensus seems to be that in the second half,the economy will not grow by more than 5.5%. CSO will come out with Q3 estimates on 22nd February and then one will finally know whether the government or outsiders are wrong. However,if one assumes 5.5%,growth for entire year will be 6.5%.

This is real growth,not nominal growth. It is possible for government to go wrong both on real growth and on the inflation component. Even if one ignores inflation,a reduction in growth from 7.1% to 6.5% will mean fiscal deficit will turn out to be 6.6% of GDP and revenue deficit will turn out to be 4.8% of GDP.

The interim budget has therefore under-estimated deficit numbers for 2008-09. In 2009-10,fiscal deficit is projected to be 5.5% of GDP,at Rs 3,32,835 crores. Therefore,nominal GDP in 2009-10 is expected to be Rs 60,51,546 crores,an increase of 11.2%. Inflation,measured by WPI,is on its way down and may even turn negative around April. However,this is inflation measured by the GDP deflator. Budget speeches and budget figures never mention expected rate of inflation.

These invariably emerge when Finance Ministry spokespersons subsequently give media interviews. Based on these interviews,inflation rate expected is between 4 and 5%. Since inflation is on a decline,even globally,5% is unlikely. At best,inflation will be 4%,perhaps even lower.

Even if inflation is 4%,real GDP growth expected is 7.2%,extremely unlikely. If growth is 6% instead of 7.2%,fiscal deficit will become almost 6% of GDP. The growth targets are unrealistic and so are the revenue targets. So are the deficit targets.