A budget is contextual.
When the new year dawned, some things were abundantly clear. Firstly, the external environment was no longer benign (rising oil prices and rising protectionism). Secondly, the growth rate of the Indian economy was slowing down (as in many countries of the world). Thirdly, while the Indian economy was growing, few jobs were being created. Fourthly, there was acute distress in the farm sector. Fifthly, three of the four engines of growth (private investment, private consumption and exports) were sputtering. Sixthly, demonetisation was a terrible disruption of the India growth story.
The context ought to have set the overall objectives of Budget 2017-18. Those objectives ought to have been reflected in the finance minister’s Budget speech, the numbers in the Budget documents and the provisions of the Finance Bill. Sadly, nothing was evident from the Budget speech. Nor did the finance minister spell out the objectives in his numerous post-Budget interviews to the media.
Context sets goals
Under UPA I (2004-2009), we chased growth to lift the growth rate from the average of 5.9% recorded during the Atal Bihari Vajpayee government (1999-2004). Beginning September 2008 and until 2012 (UPA II), the goal was to counter the consequences of the international financial crisis (September 2008) and maintain growth.
After August 2012, the aim was to pull back the economy from the deviations and renew the commitment to fiscal consolidation. In 2012-13 and 2013-14, the objective was to deliver on fiscal consolidation, inflation control and growth. Such an overarching goal is absent in Budget 2017-18.
One thing is clear: demonetisation hangs like a dark cloud over the government and its exertions. The government wants to reboot the economy but it does not know what risks it can take. For an economy that is slowing down perceptibly, and not creating sufficient jobs, the textbook prescription is to increase public expenditure. The finance minister claimed that he had done that and pointed to a rise in total expenditure from R20,14,407 crore in 2016-17 (RE) to R21,46,735 crore in 2017-18 (BE). That is impressive—but only until you convert all expenditure numbers into percentage of GDP.
When all economists were agreed and the Economic Survey had recommended an increase in government expenditure, the government has chosen to reduce its expenditure as a proportion of GDP! Not only total expenditure, but expenditure under crucial heads has declined as a percentage of GDP in the Budget for 2017-18 (see table above).
Even in a crucial area like defence capital expenditure, there will be a decline in expenditure. The capital outlay on Defence Services (Army, Navy and Air Force) was the following:
The conclusions are obvious. The defence ministry is not expected to spend the amount allocated to it in 2016-17 for capital expenditure. It will fall short by R7,071 crore, nearly 9% of the allocation. Hence, the finance minister has cut the Budget allocation for 2017-18 from R78,586 crore to R78,078 crore. Since that would not look ‘nice’, he has puffed up the number by adding R8,364 crore by the simple expedient of showing sums allocated to the heads of Defence Ordnance Factories, R&D and DGQA under ‘Capital Outlay on Defence Services’!
Also, if you look at the table (at the top), you will be alarmed to find that the allocation (as a per cent of GDP) remains the same for 2016-17 RE and 2017-18 BE for crucial programmes such as Interest Subsidy on Farm Loans, National Social Assistance Programme (old age pensions) and Mid Day Meals Scheme. Allowing for rise in the number of beneficiaries and rise in cost in the case of mid-day meals, the effect of such ‘constant’ allocation may actually turn out to be a ‘reduction’.
Fear haunts govt
Why did the government, against all advice, adopt a contractionary strategy? The ostensible reason is ‘to meet the fiscal deficit target’, but even after contraction the target has not been met. It has been set at 3.2% in 2017-18 BE when it should have been set at 3.0%. It is obvious that the government fears that it has overestimated the GDP for 2017-18; or the government’s revenue projections are aggressive and may not be achieved; or the government’s estimates of expenditure are under-stated; or all of the above.
Will the strategy work? Will it boost economic activity and deliver growth of over 7%? Will it attract private investment? Will it create jobs? I doubt it.
The government should have adopted an expansionary strategy coupled with bold and broad reforms. It should have attempted a more ambitious disinvestment programme. It should have implemented the recommendations of the Expenditure Reforms Committee (appointed by it) and cut wasteful expenditure and expenditure that have yielded no results.
Fear haunts the government. It seems to have given up on bold reforms.
Website: pchidambaram.in @Pchidambaram_IN