Column : Achieving the impossible, three times in a row

Written by Surjit S Bhalla | Updated: Mar 1 2013, 06:02am hrs
By any yardstick, UPA-2s performance has been the worst ever for India, and the worst among most comparable countries in the world. It takes a lot of talent to do the following: (1) Increase the inflation rate from 5% to more than 10% in the short space of 3 years. And to keep it sustained at double-digit levels for 4 consecutive years. No other country has been able to achieve this feat. (2) Decelerate growth by a full 5 percentage points in the short space of 2 years, 2010-11 to 2012-13. No other country in the world, with the possible exception of Greece, has been able to achieve this decline. Actually, I lieeven Greece does better than UPA-2 India. GDP growth in Greece was minus 3.5% in 2010 and is estimated to be minus 6% in 2012, a decline only half that of India. (3) Considerable worsening of the current account deficit (CAD)estimated to be close to 5% of GDP in fiscal year 2013-14, a decline of 3 percentage points since 2009. Incidentally, Greece shows an improvement of 4 percentage points in its current account deficit to a level close to minus 6% of GDP, not that far from India.

This was the background against which P Chidambaram presented the Budget for 2013-14. If you were the finance minister, wouldnt you recognise that there was dire need for reform Yes, I thought so too. Hence, given the extremely sorry state of affairs of the UPA-2s Indian economy, it was expected that one of the leading reformers in India, Mr PC, would present a reformist Budget. Indeed, the first 2 minutes of his Budget speech indicated that PC was ready to put India back on track. But that was to prove illusory, and depressingly so. The FM proceeded to present one of the most anti-reform Budgets in recent times. This is where UPA-2 achieved the impossible for 3 years in a rowsomething even Don Quixote would not dare attempt. The first impossibility was the devastation of the Indian economy in such a short period of time. The second impossibility was the retrograde Budget presented by Chidambarams predecessor, Pranab Mukherjee. The third impossibility is for a reformer to present an anti-reform Budget. It appears as if PC has been made to pay for his reformer image. In all honesty, I do not see this as a PC Budget; one can only speculate on the pressures he must be working under.

The most important objective of PC, in his own words over the last several months, was to prevent a ratings downgrade. Has he been able to achieve this target Let us look at some basic numbers. A significant part of the runaway fiscal deficit (and associated CAD) has been caused by government expenditures getting out of hand. So what does UPA-2s final Budget propose An expenditure growth of 16.3%, and much, much higher than its estimate of nominal GDP growth of 13.4%! That is, far from enforcing a decline in the growth rate of expenditures, UPA-2 has actually significantly increased the expenditure-to-GDP ratio from 14% to 14.7%! But there is a decline in the fiscal deficit so all must be OK Yes, according to the calculations of UPA-2. Tax revenue is projected to gallop by a voodoo 19% with a GDP increase of 13.4%. Such a swelling is most unlikely, given the slow growth of the Indian economy, and likely to be made slower still by the tax increases announced in the Budget.

Note that the numbers pertain to revenue from taxes, and exclude any revenue that might be gained from selling the family silver, which may turn into the family bronze after UPA-2 is done with the Indian economy. Perhaps the increase in super-rich tax will add a lot of revenue. Chidambaram has proposed a surcharge of 10% on the 42,800 individuals who earn more than R1 crore. Assume for a moment that the average income of these individuals is an upper bound R1.2 crore on which they pay an upper bound 30% of taxes. Tax revenue from these individuals before the surcharge: 36 lakh times 0.428 lakh or R15,400 crore. Assuming full compliance, a 10% surcharge will yield an extra R1,540 crore. Total tax revenue is scheduled to increase by R1,98,000 crore. The surcharge will yield less than 0.8% of the revenue increase and will yield less than half the projected increase in UPA-2s flagship in-the-name-of-the-poor corruption programme, MGNREGA. Corruption because more than half of the beneficiaries are in the top third of the consumption distribution in India, at least according to the detailed questions on MGNREGA in the 2009-10 NSS survey on employment. Of course, it is possible that all of this corrupt leakage has been eliminated by now. Possible, but not likely.

I am afraid the talk will soon turn to the credibility of the growth numbers projected in the Budget. The first 3 quarters have grown at an average 5% rate. GDP for the whole year is likely to be less than 4.8%, which will make the 2012-13 growth rate to be the fifth lowest in the last 20 years! If you believe UPA-2s growth and tax projections embedded in Mr Chidambarams Budget for 2013-14, I have some used cars, a bridge, and snake oil for you to buy.