The linkages between government spending and overall economic growth cannot be overstated for India. The share of the public sector in GDP is greater than the share of agriculture. The fiscal position can benefit greatly from a good economic performance, and there is an expectation that good fiscal management would have a positive impact on the economy. Growth and inflation are the two macroeconomic parameters on which this inter-relationship is often judged. The Budget for 2008-09 has provided a number of demand side nudges to cushion the impact of slower growth in global demand. It also seems to suggest that the same measures are likely to keep inflation getting worse. But the aggregate picture does not tell us about the longer-term implications of strategies that are meant to counter short-term concerns.
The Budget proposals for the coming fiscal illustrate an unpreparedness for the bounty of high revenues. Even after increased support for Five Year Plan programmes during the year, announcements of support for such one-offs as the farm loan waiver, other Plan initiatives and the need to meet pay hikes for Central employees following the recommendations of the Sixth Pay Commission, the Budget speech does not express any fiscal stress. The general expectation may be that uncertainty over revenues is greater than over expenditures. In this Budget, expenditure uncertainties during the year seem higher than earlier.
A recurring theme in the assessment of Budgets is whether there are measures that provide long-term benefits or the spending is aimed at short-term relief. The fact that the bulk of borrowing is done merely to meet current expenses is seen as an indication of an unsustainable fiscal position. While the argument has merit, our inability to identify strictly what is current expenditure and what is capital expenditure makes it harder to argue that a larger share of current expenditure in the Budget is less productive.
In the year?s Budget proposals, the revenue deficit makes up 40% of the fiscal deficit. In 2007-08, the revenue deficit was 45% of the fiscal deficit. The expectation, therefore, is that the borrowing this year is more for purposes of capital rather than current expenditure. As a benchmark, the ratio was close to 80% in 2003-04. In this sense, there has been an improvement in the quality of expenditures.
However, this feature is clouded by the fact that some of the likely expenditures presently not explicitly part of the Budget estimates are under current expenditures?for example, the higher wages and salaries to be paid on account of the Sixth Pay Commission. Also, it is not clear what will be the impact on the Budget of the farm loan waiver. The budgetary provisions for central subsidies on food and fertilisers have been insufficient in the past. The need for current borrowing is likely to increase as the year progresses.
An important positive in this year?s Budget is its strengthened support for ongoing programmes. Look at the increased support for education, health, rural infrastructure and agriculture, all positive. Rather than start off in new directions, consistent support for schemes and programmes that are likely to provide widely shared benefits will have greater long-term impact.
The extension of NREGS to all districts is a measure that was widely expected, and the challenge now would be to run this job guarantee programme efficiently in future. In fact, many of the programmes, whether aimed at physical or social infrastructure, will have implications to current or recurring expenditures in the future, as related capital assets will have to be maintained for them to remain productive.
This year?s Budget has shown that larger resources are now available for public expenditures. The increase in tax revenues in 2007-08 amounting to Rs 90,000 crore was almost twice the additional capital expenditure for the year. In other words, significant increases in tax revenues as a consequence of higher economic growth can provide the resources necessary for maintaining productive assets. The only issue would be whether today?s expenditures will go towards generating that additional growth. And it is not growth during just one year, but a sustained high rate of growth.
It is in this sense that the Budget proposals raise concerns on sustainability of India?s fiscal balances. The conversion of current liabilities into future liabilities, as in the case of conversion of subsidies into bonds, reflects the gap between current resources and expenditures. These are not self-extinguishing expenditures. The ability to meet these liabilities can only come from more growth and revenues from other sectors. One guiding principle for the Budget was set by the FRBM Act.
It now appears that some of the government?s borrowing is not captured in the limits imposed under this legislation. The only way in which there can be consistency between FRBM targets and excluded expenditures is if such expenditures lead to more growth and higher revenues.
Shashanka Bhide is senior research counsellor, NCAER. These are his personal views