Col (Dr) PK Vasudeva (Retd)
Will Finance Minister P Chidambaram be able to revive India’s growth story with Union Budget 2013-14? Fingers are being kept crossed, despite the odds. Undeniably, the first advance estimates for 2012-13 released by the Central Statistics Office (CSO) recently puts growth at 5 per cent – the lowest since the 4 per cent of 2002-03 and a far cry from the average 8.5 per cent recorded during the eight years from 2003-04 to 2010-11. This is the gloomiest projection of India’s current economic activity by any agency so far. The official GDP growth estimate of the CSO is a shocker for the RBI as recall that only on January 29 it had projected growth for this fiscal at 5.5 per cent and the IMF has just revised its number down to 5.4 per cent. Moreover, two days later, the Government brought down its GDP growth estimate for 2011-12 to 6.2 per cent, from the previous 6.5 per cent.
It is not the growth slowdown per se that is the real worry. A hallmark of the India growth story of the past decade was that it was essentially investment-led. The average annual growth in gross fixed capital formation (GFCF) during 2003-04 to 2010-11, at 13.2 per cent, even exceeded the corresponding overall GDP growth. Since then, it has been just the opposite, with the growth in GFCF – 4.4 per cent in 2011-12 and an estimated 2.5 per cent for this fiscal – falling below general GDP growth.
Indian economy needs investments not only to boost productivity that comes from building new roads, power plants or industrial estates, but also to generate employment and incomes. Without the latter, it is not possible to even sustain consumption beyond a point. The fact that private final consumption expenditure growth is pegged at a mere 4.1 per cent this fiscal, as against 8 per cent in 2011-12, shows how the drying up of investments is now beginning to impact consumption as well when the unemployment and existing jobs are under threat.
Finance Minister P Chidambaram has also argued that a lower fiscal deficit will not only avert a rating downgrade threat but also bolster economic growth prospects as borrowing costs for private investors will fall, helping lift capital investment growth from a five-year low.
Fiscal consolidation for higher growth and lower inflation goes beyond the annual budget. The Medium Term Plan for three years under the FRBM Act 2003 is not opaque with clear breakdown of revenue and expenditure projections; nor are the assumptions underlying these clear.
The Government therefore will have to push the growth pedal that much harder. Although it has moved ahead since September 2012, the pace is still too slow for international observers. Expectations of a growth-inducing budget had already built around Chidambaram’s stated commitment to reversing the fiscal and trade deficits. This data can only strengthen those expectations but they must be tempered by the political limits to reducing subsidies in an election-eve budget.
The IMF reckons India’s potential to grow may have slipped by a couple of percentage points and pulling back would require some hard decisions on reforms, particularly on deregulating the financial sector. Investors, too, are waiting for reforms to show up in the growth-inflation dynamic. Credit rating agencies had thawed to India upon sighting green shoots of recovery.
The slowdown is widespread with only a few sectors – construction, community personal and social services, and mining – showing increases over last year. Manufacturing has been worst hit.
The country’s high savings rate, has underpinned much of its growth and investment boom of the past decade. The Government’s latest national income data shows a significant fall in gross domestic savings in the Indian economy from 34 to 30.8 per cent of GDP between 2010-11 and 2011-12. But indications are that the savings rate could drop even further. The Japanese brokerage firm, Nomura, basing its calculations on more current trends in investments, reckons that it might touch 27 per cent this fiscal.
The correct parameter is elimination of all non-productive and non-developmental expenditure, and coming out with specific schemes and projects which are development and growth-oriented.
Subsidies for fuel, food and fertiliser are a major non-developmental item. Total elimination is not feasible. But mere tinkering and periodic price increases do not touch the basic underlying issues. A few examples are, dismantling the administrative price mechanism for fuel, non-examination of the cost structure for possible reduction, understating the budgetary provision and thereby the budget deficit and problems involved in targeting intended beneficiaries and the element of diversion.
The Railways pose a serious problem. Recent increases in passenger fares amount to tinkering, without any medium-term strategy. Freight charges continue to subsidise passenger fares, which are indefensible when faced with inflation. The operating expenses ratio of the Railways is at an all-time high, resulting in lack of internal resources for priority investment with consequent dependence on government budgetary support.
Mobilisation of revenue is a tool for fiscal sustainability. It should be done without impeding growth. Tax exemptions are numerous and substantial, costing more than Rs 4 lakh crore to the Government.
Tax reform like goods-and-services tax (GST), improvement in tax administration and bringing unaccounted money in the tax net are other issues. Disinvestment is a short cut to reduce budget deficit and not a cure for fiscal ills.
Hopefully, the Budget will be driven by economic reality. The least we assume is that the spending cuts that have taken effect over the last three months will carry on. These measures have only contributed to savings for about a quarter of the current fiscal year ending 2013, and so they should make a full year’s contribution in 2014 – all the better for the country’s credit profile.
One encouraging fact is that the spending cuts have started across the board, and even the defence expenditure has not been spared. The number of State-sponsored schemes is likely to get drastically reduced, with a particular focus on areas with inefficiencies and wasteful spending. Therefore, the deficit target of 4.8 per cent for 2014, after the 5.3 per cent set for 2013, looks within reach.
Chidambaram is likely to raise its tax intake – another necessary, if unpopular, move. It would not be too ambitious to expect personal tax rates and excise duties to be increased, but it would be folly not to expect tax loopholes to be closed. The biggest wildcard is the countrywide GST, which, by supplanting lower-level taxes and levies, will reduce red tape, oil the revenue-creation process, and ultimately promote growth.
The FM has been advised linking Mahatma Gandhi National Rural Employment Guarantee Scheme with agriculture to help meet the shortage of farm labour in the sector.
Chidambaram has already slashed actual public expenditure in the current fiscal year by some 9 per cent from the original target. So the plan for 2013/14 would in effect keep a lid on spending, limiting it to a similar rupee level or slightly higher.
The task of the FM in the ensuing election year is difficult to control fiscal deficit and inflation within reasonable limits but with ‘animal spirit’ and sustained reforms he should be able to bring a balance in the budget.-(INFA)