In analysing any Budget, the following things must be watched: the nature and content of changes in taxation (tax base, tax rates, tax process, tax administration); expenditure management; debt management; efficiency and productivity of expenditure; and the impact of taxation and expenditure on the economy. Budgetary deficit has two opposite effects simultaneously on private investments: ‘crowding-out’ effect occurs when the government borrows domestically to finance its deficit, funds are siphoned off from the economy and interest rates jack up, which discourages private investment. ‘Crowding-in’ effect occurs when government expenditure leading to deficit puts money in people’s hands, raising demand for consumer and capital goods, thus incentivising private investment.
Since ever-increasing deficits can lead the economy into a ‘debt trap’, fiscal austerity becomes necessary and with rising level of education even the reasonably educated common man must comprehend and appreciate the long-term need for fiscal consolidation rather than cribbing about rising taxes or falling subsidies. On the other hand, the economic entities must see through the political agenda, impact of various lobbies on budgetary allocations, galvanised figures and take any goodies with a pinch of salt.
For instance, when a finance minister is sure that he/she will not be in power to present the next Budget, he/she will push chunks of expenditures on to the next Budget, but pull next year’s revenues on his/her Budget. Thereby, he/she will pretend to stay under the deficit target without pushing any expenditure items off-budget. In the present interim Budget, although indirect taxes couldn’t be changed in a Vote-on-Account, automobile sector has received lower excise duties. This sector has strong backward and forward linkages and is considered the face of Indian economy. The cheaper loans to honest farmers, one-rank one-pension, interest waiver for education loans taken before 2009 and continuation of higher tax on the super-rich are not pre-election populist measures as such. But there is something else that is worrisome.
‘Debt trap’ is a situation wherein the revenue deficit is high and rising, leading to more borrowings and hence a rising interest burden, which further raises the revenue deficit, getting out of the situation being extremely difficult. India has been on the verge of a debt trap many times in the past. In the accompanying table, we can see that the interest payment was less than the revenue deficit in 2012-13 and 2013-14 Budget estimates, but more than revenue deficit in revised estimates of 2013-14 and projected Budget estimates for 2014-15. If debt trap is a situation when the government borrows even to pay the interest, then that would happen when the interest payment is greater than the revenue deficit? Thus, the table shows that the entire revenue account borrowing is going towards meeting the interest payment obligations, and is yet not adequate. Does it mean that India has already entered the scary ‘debt trap’ situation? Best luck to the next finance minister.
Primary deficit, which is the fiscal deficit minus interest payments, indicates government’s fresh borrowing requirement. Over the same years, it has fallen from 1.8%, 1.5%, 1.3%, 0.8% of the GDP. This means that interest payment, thus obviously the debt burden, has gone up over the years and without it we would be close to achieving a balanced budget! What’s even more worrisome is the government’s denial that there ever was any policy paralysis, their complacency with the GDP growth numbers hovering around 5% and little attention to inflation. Also cause of concern is India’s rising proportion of external debt. Foreign borrowing makes financial sense from the angle of lower interest rates abroad where funds are typically cheaper. But on the flip side, the country owes as much to foreigners rather than to India’s future generations.
There were no expectations from the present interim Budget, since it could neither harm nor help the Indian economy for two reasons. One, its provisions will be effective only for a few months and second and more important, Indian economy is driven to the current status as a cumulative effect of the past few years of political arrogance and economic mismanagement. Given the situation of inflationary recession, twin deficits, corruption and paralysis, even a full-fledged Budget could have hardly done much, leave alone an interim one seeking Vote-on-Account. So, what next?
If RBI refuses to fall in sync with the finance ministry, government can buy back bonds, thereby reducing their own debt and interest obligation and also pushing the required liquidity into the system. The next Budget, post-elections, must get cracking on subsidy-reduction, infrastructure-building, tax rationalisation and other things that rulers are wary of doing close to elections. The next government with elections five years away can and must really do stunning things for the economy.
The author is faculty of economics in SIMS, Symbiosis International University, Pune.