In the Union Budget 2011, only the books tally and nothing else, writes Sanjeev Pandiya
07-Mar-2011 •Sanjeev Pandiya
For a columnist who focuses more on philosophy than on analysis, this is an unusual column. The mass media seems not to have noticed the government's accounting legerdemain, embedded in the budget. It is a 'paralysed' budget, with no major change in direction, although there are some pious platitudes in the fine print. And that is the saving grace, because in pursuance of those objectives, the government can kick off some major reforms during the course of the year, whenever it gets terrified enough to do so. Whether it will or not has nothing to do with the thought process invested in the budget (which seems to have been minimal), but will, as always, be a reaction to subsequent events (maybe the state elections coming up later this year).
Let us look at the illogic in the accounting numbers. GDP growth rate is projected at 9 per cent, a slight improvement over last year. As the accountants say, "as per last"…! I can't quarrel with that number yet, because you have to start somewhere. Inflation seems to be assumed at 5 per cent, because the growth in nominal GDP is taken at 14 per cent (the difference can only be inflation). So tax revenue growth is assumed to be 18.5 per cent, assuming a small uptick in tax compliance, I suppose. How did we do last year? On a nominal GDP growth of around 20.3 per cent (8.3 per cent real and 12 per cent inflation), tax revenues grew 25.9 per cent. To assume that tax revenue growth will outstrip nominal GDP growth is only fair if you know the composition of inflation. For example, last years' tax revenue growth includes customs duty growth of 58.2 per cent (in a year when the Current Account Deficit went to 4.1 per cent). Is a repeat performance likely? The inflation last year came from food prices, and agriculture does not contribute anything to taxes, so we cannot assume that high inflation (especially if it comes from food inflation) leads to higher tax revenue growth.
This year, the budget papers seem to have the facile assumption that inflation will print in at 5 per cent, no idea how. Implicitly, a fantastic monsoon is assumed, with somehow, low energy prices followed up with low commodity inflation. Given the background of erratic weather patterns, an inflamed Middle East and a resurgent US, I don't see how global inflation will suddenly cool down to achieve anything close to such a number. And if customs duty growth does not help, how will you achieve such a steep tax revenue growth? Just because people will be nice to you?
Remember, non-tax revenues like telecom licence fees, which grew 89 per cent last year, are expected to drop 43 per cent, despite targets of Rs 16,000 crore from FM licences and telecom fees. I don't think anybody is expecting a bonanza this year, unless some stiff fee is levied on the scam-tainted telecom companies.
The tax to GDP ratio is assumed at 10.4 per cent, slightly below the peak rate achieved, i.e. 11.9 per cent in 2007-08. That was a boom year for corporate profitability. And what is the market outlook for corporate profitability this year, if the Sensex is hitting YTD lows a day ahead of the budget? It all depends on the composition of inflation: if it is made up of a sudden increase in pricing power for manufacturers, then so be it. But if inflation comes from high energy and even higher food prices, I don't see the tax to GDP ratio going up. Quite the reverse; if inflation starts to hurt, there will be a drop in tax compliance.
So one of these things is going to fail you: either the GDP growth rate, or inflation or tax revenue growth. The net result: the fiscal deficit will not come in at 4.6 per cent, unless you count the capital receipts coming from PSU divestment (Rs 40,000 crore). This number has always failed us, and given the prevailing market sentiment, I don't see how it is going to be achieved. Any shortfall will only add to the fiscal deficit.
Let us now take a look at the expenditure side. This is where the budget assumptions lose further credibility. Last year, inflation ran at 10+ per cent, and expenditure increased at 18.7 per cent. This year, inflation, by the government's own projections is expected at an optimistic 5 per cent, and the government is projecting expenditure growth of only 3.4 per cent. With Plan expenditure still growing at 11.8 per cent, the government actually expects non-Plan expenditure to contract by 0.7 per cent, mainly because of lower provisioning for subsidies.
Now make of this, what you will. In a year when the Food Security Bill is to be passed, food subsidies are actually going to be constant. So obviously, you should not be surprised when fertiliser subsidy actually drops 9.1 per cent, or 'Other Subsidies', which grew 58.2 per cent, actually drop a whopping 49.9 per cent. And either some very big policy change is round the corner in petroleum, or this is plain obfuscation, because the bulk of expenditure drop comes from this assumption. If you are going to acquire 65 million tones of food grains during the year, it will raise the food subsidy bill by at least Rs 20,000 crore; that alone will put you back at last years' level. And if the oil gods are not kind to India (and I see no reason for them to be otherwise), I don't see why the fiscal deficit will not come in higher.
Which makes inflation targeting, the main theme of the budget, the first casualty. By no stretch of the imagination is this a path-breaking budget that even sets a direction towards reforms, unless you believe the stuff about petroleum subsidies. If the subsidy is actually withdrawn, oil prices at the pump will rise dramatically, and that itself will affect inflation. How can you then assume such low inflation?
So what do you make of the other long-term promises, like Manufacturing to go to 25 per cent of GDP? It seems like just a wish statement, with little substance or strategy embedded in the budget.
I had much hope that something would be done for investment in agriculture, other than sops. In particular, the nexus between clean energy, water management and agriculture would be recognised and we would get some hint of a big bang reform in that area, either a skeletal framework for the entry of corporates, or some new regulations to liberalise long-term land leases. There are some unimaginative sops to Clean Energy, LED lighting and solar, but no clear strategy emerges in this critical area.
Quite simply, a budget going nowhere, unless the government has some positive surprises in store for us later in the year. This Prime Minister has done it before, and I can't seem to give up hoping. In particular, if the expenditure control is contained because of fundamental and structural reforms in an election year, we might just see a counter-intuitive movement of opinion from a scam-tainted government to a governance-focused, reform-oriented party and government. People want to believe. Mr. Singh has done it before and can do it again. Whether he will or not, only two people in this country know.
This column appeared in March 2011 issue of Wealth Insight.