Shed a few years for the next Finance Minister of India. After having presented ten Union budgets over the last decade in both the United Progressive Alliance governments between 2004 and 2013 as well as the United Front government in 1996-97, the chances of Palaniappan Chidambaram presenting another budget in the immediate future are not very bright. This is simply because the chances of the incumbent regime returning to power are not bright.
Will the Finance Minister's February 17 speech presenting the interim budget for 2014-15 become his swan-song? The more important question relates to the kind of economy he is leaving behind. The answer is clear: an economy in a state of shambles. Inflationary pressures are high and job opportunities are hardly growing.
For the first time in the history of India, there has been double-digit food inflation for the better part of a period of six years. The latest data put out in a survey conducted by the National Sample Survey (NSS) Organization indicate that the annual rate of growth of employment between 1999-2000 and 2011-12 was merely 2.2 per cent, that too, during a phase which is supposed to have witnessed “impressive” and “unprecedented” economic growth.
A December 2012 paper entitled “Joblessness and Informalization: Challenges to Inclusive Growth in India” prepared by the Institute of Applied Manpower Research, an organization under the Planning Commission, observed: “One of the most disturbing numbers that the 2009-10 employment-unemployment NSS data show is the addition of merely 2.76 million work opportunities during the period of fastest growth for the economy... Compared to this, there was an addition of 60 million to the workforce during 1999-2000 and 2004-05.”
Controlling food prices and creating employment are difficult tasks. The daunting challenge for the next Finance Minister will be to find out ways to expand the economy. Chidambaram has been obsessive in cutting the fiscal deficit. And even if one believes that this is a good thing, the manner in which this has been achieved will have deleterious consequences. Why? This is because Plan expenditure has been cut drastically which will have the effect of contracting the economy.
In February 2013, Chidambaram had confidently claimed that the Indian economy would grow by five per cent in 2012-13 even though it was pointed out to him then that he was being excessively optimistic. On the last day of January 2014, the truth was out when the Central Statistics Office finally came out with the actual figure. India's gross domestic product had grown by 4.5 per cent during 2012-13, the lowest in a decade.
Official statistics show that the deficit has been cut by over-estimating revenues, postponing payment of subsidies and slashing the Central government's Plan outlays. International credit rating agencies may be happy with this strategy but not the country's underprivileged. How has the fiscal deficit been cut to a level below the “red line” of 4.8 per cent to 4.6 per cent of GDP? The revised Plan expenditure is lower than the budget estimate by as much as Rs 80,000 crore or 0.7 per cent of GDP.
The Central Plan outlay has been reduced by Rs 66,000 crore and Central assistance to the Plan expenditures of states and Union territories is down by over Rs 17,000 crore. Payment of subsidies worth roughly one per cent of GDP, including subsidies for petroleum products worth Rs 30,000 crore, have been pushed to the next fiscal year. The total tax collections in the revised estimates for the current year are expected to rise by 13 per cent against the budget target of 19.4 per cent.
Chidambaram has implicitly acknowledged that two of his biggest failures - he describes these as “disappointments” - have been his government's inability to arrive at a consensus with states on a minimum goods and services tax and the fact that a Direct Taxes Code has not been put in place. If more attention had been paid to these kinds of economic reforms, instead of other so-called reforms that include rolling out the red carpet for foreign investors, the country's economy would have been in better shape.
A major problem facing the financial sector is the rising non-performing assets of public sector banks. Chidambaram has kept aside Rs 11,200 crore for capital infusion against Rs 14,000 crore in the current year. The requirements of the banking system are much higher. The proportion of the stressed assets of many banks to their total assets is in the region of ten per cent. And most of those who haven't repaid their loans are big businessman like Vijay Mallya.
A most inexplicable aspect of the February 17 vote-on-account is the government's decision to accept the principle of one-rank-one-pension for defence personnel (for which Congress vice president Rahul Gandhi has sought to take credit). A relatively small sum of Rs 500 crore has been earmarked for this purpose for 2014-15. Why then was this decision kept pending for as long as it was?
The outgoing government has sought to emphasize two aspects of economic policy: accelerating GDP growth at any cost and cutting the fiscal deficit. This neo-liberal strategy has not worked. GDP growth has decelerated over the last two years. More significantly, even when growth had peaked at nine per cent three years in a row between 2004 and 2008, this pace of GDP growth did not bring about “inclusive” development. Few jobs were created and persistent food inflation sharply widened the gap between the rich and the poor.
The next Finance Minister will have an extremely tough time ahead of him.
This article was originally published on April 25, 2014.
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