Will Finance Minister P Chidambaram's Union budget for 2013-14 meet the same fate as his budget for 1997-98, which was first described as a "dream budget" by the pink papers and then turned out to be quite a nightmare on account of political instability? Time alone will tell whether two key assumptions he has made this time round – that the rate of growth of the country's gross domestic product (GDP) for the financial year that will end on March 31, 2014 will be 6.5 per cent and that the rise in the wholesale price index (WPI) will be contained at the same proportion – are accurate or not. But there are reasons to believe that the Finance Minister has been unduly optimistic, not realistic. Why?
To expect the rate of growth of GDP to jump one and a half per cent from 5 per cent in 2012-13 tacitly implies a number of favourable scenarios: the international economic situation will improve over the coming 12 months, world oil prices will remain stable, industrialists at home will start investing at home and not abroad, the government will be able to contain its unproductive expenditure and, most importantly, subsidies on the three 'F's, food, fertiliser and fuel, will remain more or less where they are at present or be brought down. None of these assumptions are realistic.
All finance ministers – in India and the world – are paid to be optimistic. Even if he denies it, Mr Chidambaram decided to bring down the fiscal deficit to 5.2 per cent of GDP by drastically slashing Plan expenditure (by almost a fifth when one compares the budget estimate with the revised estimate for 2012-13) because he wanted to prevent foreign credit rating agencies from downgrading India's sovereign debt rating. He convinced his party members that the committee he appointed (headed by Vijay Kelkar and comprising like-minded individuals) was the ultimate repository of wisdom as far as the fiscal deficit proportion was concerned. It is a separate matter altogether that the governments of many countries across the world are right now merrily hiking their deficits on account of the ongoing recession and those that are not (in the name of austerity) are facing social and political turmoil.
Such arguments are not for Mr Chidambaram. He and Prime Minister Manmohan Singh are convinced that a fiscal deficit of 5.2 per cent of GDP in 2012-13 and 4.8 per cent the following year is the best dose of medicine for an economy where GDP growth has slowed down dramatically. This, in turn, means that not only have government expenditures to be cut down substantially, subsidies must be curbed too. Food subsidies are to go up only marginally even if a new right to food law is enacted. Fertiliser subsides are projected to remain where they are. What is more, subsidies on petroleum products are to come down by nearly Rs 32,000 crore, presumably by periodic hikes in diesel prices. At the same time, the government hopes headline inflation will remain at 6.5 per cent – this is almost certainly not going to happen.
There is another aspect to cutting government expenditure. While cutting the flab, the knife may slip into flesh and muscle and perhaps even dig into the bones. That is the danger that is real and present which North Block is refusing to acknowledge. A big show has been made about taxing the rich – to be precise, 42,800 income tax assesses with a taxable income of more than Rs one crore will each now pay an additional tax of around Rs 2.65 lakh and that too, for just a year – not widening the tax net in a country where barely 3 per cent of its population pays income tax nor upping the tax-to-GDP ratio by removing tax concessions to the corporate sector that exceed the aggregate current account deficit as well as the fiscal deficit.
In his last full-fledged budget before the sixteenth general elections, the Finance Minister has fooled few by his adroit arithmetic. The same credit rating agencies and foreign institutional investors that have applauded his budget may stab him in the back when they realise his numbers are just not going to add up. Mr Chidambaram's budget may end up being neither good economics nor good politics.
This article was originally published on April 05, 2013.
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