Budget 2016-17 should be regarded as one of the best, perhaps the best, since 1996
Budget 2017 has met with near universal approval for its commitment to the path of fiscal consolidation (and focus on agriculture). On deeper investigation, the path of fiscal consolidation for the current fiscal year is even more impressive than credited by experts. As is well known, the accounts for any fiscal year run from April to March.
Throughout this article, a fiscal year will be represented by the first year, i.e. April 2015 to March 2016 is year 2015.
The world, and India, has been going through a long period of declining inflation—the world since the crisis year of 2008, and India since the exit of the UPA-led government in May 2014. If this decline is broadly structural, then it is likely that the government will consistently miss the targeted nominal GDP growth. This has been happening consistently in India since 2011.
Inflation (CPI) in India reached a peak of 13.2 % in 2009. The seriousness of this peak in inflation during the UPA regime is brought out by the following statistic—since 1974, there has been only one occasion when CPI inflation was higher, i.e. in the reform year 1991, when CPI inflation hit 16.6%. Now no one, not even the most apologist admirer of UPA dole-onomics, has even dared to suggest that 2009 was a reform year. To be fair, 2009 was a year after the financial crisis which started in May 2008. But this crisis brought inflation rates down around the world. Oil prices declined by more than $15 in 2009 from the previous year average of $86 per barrel; median CPI inflation in emerging economies fell to an annual rate of 4.1% in 2009, after declining by 5.5 percentage points; and to 0.4% for developed economies, after falling by 3 percentage points. On the other hand, in India under the UPA regime, CPI inflation accelerated by 3.5 percentage points to 13.2%. This was a policy choice made by the UPA government in terms of increasing doles to win over hearts, and minds, and votes—the economy, and fiscal discipline, be damned!
At the time of the last Budget presentation, February 2015, the BJP government committed itself to a share of fiscal deficit to GDP target of 3.9%. This goal involves two separate “targets”—a target for the nominal revenue and expenditure stream of the government, and a target for nominal level of GDP. This is all very standard and as it should be. But the denominator (actual GDP level at the end of the fiscal year) is affected by several domestic (e.g. weather) and international factors (e.g. global growth, oil prices); i.e. factors nearly exogenous to any government. But the numerator (revenue and expenditure) is within the control of the government and is directed by the policies they choose to follow. However, the analysis of fiscal discipline should be limited to factors the government can control or influence.
Our method for estimating real fiscal discipline (RFD) is straightforward. If the level of nominal GDP level is above that targeted for the year, then the fiscal deficit (as a percent of GDP) should come out below target; if nominal GDP level is below target, then it should come out above target. RFD is, therefore, defined as the difference in the actual fiscal deficit and the budgeted fiscal deficit, after adjusting for actual GDP levels. For example, in 2011, actual nominal GDP was 2.7% below target and the fiscal deficit target was 4.6% of GDP. Since the fiscal deficit target was 4.6% of GDP, shortfall of 2.7% in GDP meant that the adjusted fiscal deficit should be [4.6 x (1+.027)] or 4.73%. Note that the plus sign changes to a minus sign if the actual GDP level is above the budgeted level.
Now, the actual fiscal deficit in 2011 came in at 5.9% of GDP; budgeted was 4.6%, should have been 4.7% (after adjusting for GDP level). Hence, the RFD was +1.2%, or the worst since 2008 when, because of the fiscal crisis, the RFD came in at 3.7%—this was the highest since our tabulation of data for budgeted and actual GDP and fiscal deficits (since 1997). Note that the budgeted versus actual data are not available on any website, including the RBI’s!
The table documents the performance for 20 years, including averages for different political regimes. The RFD for the last two Modi/BJP years are near identical at 0.15% of GDP—i.e. in each of these years, the fiscal deficit came out 0.15% below what it should have been. BJP has not been given any credit for their performance in 2014, partly because they increased the target deficit from 3.9% to 4.1% of GDP for that year. But the decline in deficits by a cumulative 0.3% of GDP in the two years 2014 and 2015 implies that the Modi-Jaitley regime has nearly made up for that fiscal indiscipline.
To be sure, in each of the numbers contained in the table, there are “errors”. As far as fiscal deficit numbers are concerned, there is the traditional kicking of the can down the road—e.g. part of the fertiliser subsidies appear in the next year as “expenditures”. For GDP estimates, there are some who maintain that GDP growth is overestimated at present. Note that this presumed error does not creep into our calculations since we are here concerned with just nominal numbers. (Though I am sure some will argue that the nominal GDP numbers are not accurate, in which case one will need to know the direction of the bias before coming to any conclusions about fiscal performance!)
What about oil price decline? Whenever the discussion is about good fiscal performance in 2015 (and, according to above, in 2014 as well), the caveat of declining oil prices, and hence benefit towards a better fiscal deficit (via oil taxes) is always mentioned. But while oil price changes are exogenous, the decision to tax, or subsidise, oil is an explicit policy decision, and both in 2014 and 2015 the BJP decided to pocket (into taxes) most of the decline in the international price of oil. Although the international price of oil became half in 2015, the consumer only obtained 10% of the decline.
One final point about the Budget for 2016 (or fiscal year 2016-17): Was there a turn towards agriculture? A large element of the 80% increase in allocation for agriculture is fictitious—it is just an accounting change of R15,000 crore of interest subsidy for short-term credit contained in the ministry of finance accounts earlier, which is now allocated to the ministry of agriculture. However, after eliminating this transfer, agriculture, irrigation and rural development have been allocated an increase of 16%; if inflation stays around 4%, this will be one of the three highest increases in the last 20 years.
According to a broad range of criteria, including allocations towards the rural sector, the Budget for 2016-17 should be regarded as one of the best, perhaps the best, since 1996. The BJP’s fiscal performance in 2014 and 2015 suggests that acche macro din should continue well into the future.
Surjit S Bhalla is Contributing Editor, Indian Express, and Senior India Analyst, The Observatory Group, a New York based macro policy advisory group