We won?t have a vote on account on 16th February. We will have an interim budget. This is a terrible idea. The difference between the two is that the first is a statement of revenue and expenditure, with Parliamentary sanction to temporarily spend from the Consolidated Fund, so that government doesn?t stop functioning until a new government is sworn in. A vote on account doesn?t change tax rates, unlike an interim budget. Had elections been announced, tax rate tinkering would have been construed as policy changes and wouldn?t have been possible, courtesy Election Commission guidelines. However, since elections haven?t been announced, we have an interim budget and assorted senior policy-makers have given abundant hints there will be fiscal changes. There have been reports Prime Minister wants key appointments held up, so that the new government can take decisions. By the same token, fiscal policy changes should also have been withheld. Allowing UPA government to tinker with fiscal policy is like giving liquor to an alcoholic. This government has already messed up fiscal policy and the tax reform agenda on several counts. First, there was a tax reform agenda involving standardisation and harmonisation, incorporating elimination of exemptions and discretions.
This was set out, among other places, in the three Vijay Kelkar Task Force reports and, lest we forget, there was a GST (goods and service tax) target of 2010. That too involves death to discretion. Yet, in instance after instance, this government has deviated from that path and has complicated, instead of simplifying, tax policy. The economy has indeed been hurt, notwithstanding decoupling arguments that floated around in late September 2008. Central Statistical Organisation?s (CSO) advance estimates of 7.1% GDP growth in 2008-09 almost certainly paint too rosy a picture and ride on capital formation still growing. Exports of goods as share of GDP are around 14% and exports of goods and services as share of GDP are around 21%. If exports become extinct, how can the economy grow at 7%? Barring mobile phone connections, everything else is slackening and that CSO growth of 7.1% does ride on telecom and railway freight traffic. If three triggers of consumption, investment and exports are eliminated, obviously we cannot grow at 7% and will do something like 5%. Link that with scary employment reduction figures that are floating around. Growth had already dropped, thanks to monetary tightening, from 9% to 7.5%, which is what we did for the first half of 2008-09.
If Planning Commission?s employment elasticities are right, that shaving off of growth from 9% to 7% should mean 3 million jobs lost. Yet, we have figures of 5 million from Labour Ministry and 10 million from FIEO (Federation of Indian Export Organisations). Ipso facto, the employment hit has been more severe than GDP contraction. Under these circumstances, it is possible for every sector (barring mobile connections) to argue corporate profitability has suffered and jobs are at stake. By all accounts, this lobbying in North Block and around it has already started. A test of reforms is reduction in lobbying. The wheel is being rolled back in the sense that discretionary dispensation is now inevitable in the Interim Budget and once a case is made out for any sector (read housing), a similar case can be made out for every other sector. The new government might also have been unable to resist discretion and the power (and perhaps money) that resulted from it, but UPA seems to have thrived on it. Second, every government since 1991 has underlined fiscal rectitude. Before UPA, not a single government retreated from deficit reduction as a target. It is a separate matter that they may not always have been able to accomplish the objective.
However, they never publicly gave up the goal. With UPA, that goal has gone for a six. It is incorrect to suggest this is because of global slowdown and fiscal concessions that resulted from it. On 16th February, we will learn Centre?s fiscal deficit is 6.5% of GDP or thereabouts, compared to 3% in budget estimates. At best, the number will drop to 6%, because CSO?s high advance estimates have now blown up the GDP figure in the denominator. NREGA, 6th Pay Commission and farmers? debt relief were deliberately under-budgeted in budget estimates for 2008-09, to make deficit figures look respectable. The additional fiscal stimulus consequent to global recession has at best added 0.5% of GDP to the deficit figure, because existing programmes are being shown as part of fiscal stimulus. In addition, there is a State-level fiscal deficit at 2.5% of GDP, or perhaps even 3%, now that State tax revenue will also take a hit because of lower growth. Note that States will be allowed to borrow an additional 0.5% of GDP and have begun to clamour this isn?t enough. Note also that off-budget items (oil, fertiliser bonds) aren?t part of these deficit calculations.
Hence, we are at something like 13% of GDP if all deficit-type figures are included and this is the first government since 1991 that lauds this fiscal indiscipline. Therefore, dilution of FRBM (Fiscal Responsibility and Budget Management) Act is inevitable, with a terminal year (2009-10) revenue deficit target of 0% and fiscal deficit of 3% of GDP and subsequent dilutions at State-level are also certain. Third, no one is making a fetish about the fiscal deficit. But one should make a fetish about revenue deficit. The Prime Minister?s Economic Advisory Council?s recent report suggested consumption share of GDP would increase by 4%. That?s the point. We are switching from private investment to public consumption. Productive assets aren?t being created through this public expenditure. Fourth, structural reforms that would have improved public sector?s capacity to spend and improve delivery haven?t occurred. Is the road programme flagging because of lack of funds? Job losses will lead to reverse migration to rural areas. If NREGA can?t handle this, is that because of lack of money? With UPA presenting an Interim Budget, reforms will be buried and they won?t even be praised.
That evil will live on after the UPA.