The Union budget has assumed nominal growth of 13.4% in gross domestic product in the fiscal year to March 2014. If we take the Economic Survey’s forecast of real growth in gross domestic product (GDP) between 6.1% and 6.7% in the next fiscal, it would mean an inflation rate of between 6.7% and 7.3%. Either the government is predicting that inflation is not going to come down by much, or it is pegging growth too high. It would have been more prudent to have taken nominal GDP growth at around 12.5% or so. But then, of course, it would not have been able to stick to its 4.8% fiscal deficit target, which had already been announced.
But, let’s take the expenditure side of the budget first. Total expenditure is forecast to grow by Rs.2,34,472 crore, or 16.4%, over the revised estimates for fiscal 2012-13. Note that in the year, total expenditure grew by Rs.1,26,460 crore, or 9.7%. So this isn’t, by any reckoning, an austere budget.
Does that mean the budget will be inflationary? It will be, initially, but if it sticks to the budgeted improvement in the quality of its expenditure, it could help augment supply and restrain inflation ultimately. In the year to March, capital expenditure (both Plan and non-Plan and including grants for creation of capital assets classified under the revenue head) increased by an insignificant 0.3%. In the next fiscal, they’ve budgeted for an increase of 38.3% for total capital expenditure. That is why, in the current fiscal, while the fiscal deficit as a percentage of GDP has been around the budgeted level, the effective revenue deficit, at 2.7% of GDP, is far higher than the 1.8% budgeted.
It gets even better. If we take out the rise in capital expenditure on defence, then the budgeted increase in capital spending works out to 42.5%. The increase budgeted for capital expenditure, therefore, looks very impressive, until you recall that last year too they had budgeted for a rise of around 38% in capital spending, apart from capex on defence, while the sad truth is that the revised numbers show that capex ex-defence has actually declined.
What about subsidies? The budgeted amount is lower than the revised estimates for the current year by Rs.26,570 crore, with the big saving being in the fuel subsidy. To be sure, the monthly rise in diesel prices, if it continues, will prune the fuel subsidy bill. At the same time, though, it’s worth remembering that a large chunk of subsidies from the current year still have to be paid and will be carried forward next year.
Much depends on how much is carried forward into fiscal 2014-15. There may be some slippage in the food subsidy bill too because it has been projected to increase by Rs.5,000 crore while the finance minister has said the increase in subsidy on account of the proposed food security legislation will itself be Rs.10,000 crore. Given the high capex budget, it’s likely that revenue expenditure will ultimately turn out to be higher while capex will be lower than budgeted.
That brings us to the revenue figures. Gross tax revenue, net of states’ share, is budgeted to increase by 19%, compared with 16.7% growth in the current year. The Central Statistics Office estimates nominal GDP growth at 13.3% in 2012-13, while the government is taking 2013-14 GDP growth at 13.4%, so it’s unclear why gross tax revenue growth should be budgeted so much higher.
The government’s figures on divestment are also on the higher side. True, there’s enough family silver to sell, given the right attitude, but everything depends on the state of the markets. And finally, non-tax revenues from dividends and the surplus of Reserve Bank of India, nationalized banks and financial institutions is expected to go up by an astonishing 72%. In short, there is plenty of reason to view the fiscal deficit number with scepticism.
But the budget is much more than mere accounting. With GDP growth in the third quarter of the current fiscal coming in at 4.5% and with the current account deficit expected to be north of 6% of GDP in the third quarter in spite of low growth, it’s worth remembering that we are completely dependent on fund inflows and the budget was expected to, on the one hand, increase savings and, on the other, make the Indian market more attractive. The budget has done nothing to address these issues. The higher gross borrowing figure, too, is not being viewed kindly by the bond markets.
Does the budget do anything for growth? True, it has proposed an investment allowance and the additional deduction for housing loans will help the construction sector. But with hundreds of projects stuck at various stages of implementation, surely it is generating cash flows from these investments already made that will give confidence to entrepreneurs?
At a time of crisis, the hope was for a budget that would be a cut above the ordinary. That hope has been dashed.
Manas Chakravarty is consulting editor, Mint.