The changes in the macro-economic numbers over the past couple of weeks have been so unusual, rapid and drastic, the underpinnings of the budget calculations have come unstuck. Of these, the most significant has been the acknowledgement by the finance minister that the real rate of growth of the Indian economy for fiscal 2011-12 will be at a lower pace of 8% instead of the expected 9%.
This means, all the assumptions made by the finance ministry, including the budget calculationsfor the year, must be reset and very soon. The reset is necessary on two counts. When the cost of funds is rising so fast in the economy, it is not fair that the financial markets should have to wait for the end of the year (usually the fourth quarter) to get a leeway in costs. The uncertainly will shave off some more basis points from the growth rate, which obviously cannot be the intention of the government.
A reset will be necessary as the GDP numbers have changed. The Medium Term Fiscal Policy Statement had estimated the real GDP to grow by 9% and inflation by 5%. The nominal GDP was, therefore, pegged at 14%. Flipping the numbers over to 8% and 6% does not mean the same thing, as this will mean the government is expecting a business-as-usual scenario where it needs to do nothing better.
This leads to the other reason why the finance ministry must present a mini-budget in the monsoon session with the redrawn numbers. The Fiscal Responsibility and Budget Management Act of 2003 is quite clear about this. The Act says any variations in the government accounts that affect the numbers projected for the year must be reported and corrections made every six months.
In the circumstances, the finance ministry should budget for a lower growth in corporate and even direct taxes as inflation will not lead to these floating up to a higher level. A mapping of a rise in direct tax with high inflation periods will show that a one rupee rise in prices does not create a one rupee rise in direct tax. Customs will also be flat; excise and services will be the only ones to grow apace. In these circumstances, the government will be rash in sticking to its plans to raise expenditure on the major Plan programmes now by depending on the same level of market borrowing. It might achieve the projected level of fiscal deficit but at a higher cost to the economy. On a lower GDP base, it will increase debt-to-GDP and interest-payment-to-tax-revenue proceeds.
The two costs over which Mukherjee will have little control will be subsidy and interests. Right when the budget was tabled, analysts were surprised at the tight ship Mukherjee planned to run to keep his market borrowing under control. With oil way above the projected $100 a barrel (it came down yesterday), those numbers do not hold. The projections for the interest cost were also seen as under-statements, due for changes now. The other is the fancy idea of doing off-budget borrowing like the ways and means advance of R10,000 crore to partially lower the carrying cost of food grains for FCI. Those are now going to be more costly. An unplanned third is the Bill to recapitalise the public sector banks. These loose ends may now have to be plucked out of the budget.
At present, while the financial markets are sore over the sustained rise in RBI rates, the announcement of a revised and lower market borrowing will be a huge positive as it will clearly lead to a lower cost of funds.
subhomoy.bhattacharjee@expressindia.com
