Keep out disinvestment proceeds from fiscal calculations and have a conservative growth target
Budget FY16 has been projected as the next big thing to watch out for, with hype being that it will be the clichéd game-changer. Similar hype had been built up around the gubernatorial succession at the central bank in 2013 as well as before the Lok Sabha elections last year. The various bills that were to be passed, like the ones on FDI in insurance, land acquisitions and the GST were other game-changers that passed us by quite silently. With these precedents, are we expecting too much from Budget FY16?
The major, so-called tax reform, i.e. GST, would be possible only from FY17, and hence is out of the purview of the present Budget. Some rates would change then but those would not be the reforms that change the canvas. So, what can we look out for in the upcoming budget that would make it different from the usual statement of accounts presented on February 28?
A feeling of déjà vu creeps in every year when we look at how the budget is balanced. Ever since the economy slowed down, the story has been the same. The fiscal deficit keeps ballooning, with over 70% of the deficit being consumed in the first half of the year, and then the government’s hurry to control the fiscal deficit situation forces the expected action. Expenditures are cut across departments and the capital plans are stalled. Some hasty action is taken on disinvestment and some expenses are rolled over to April, which ensures that the current year’s numbers look good. Can we change this?
There are three things that the budget needs to focus on; these can work towards ensuring that the dismal budgeting story is not repeated. First is the assumed target for GDP growth in nominal terms. This is critical because around 55% of the total budget is accounted for by tax revenue which normally is closely associated with this number. This is one area where the government has little control as taxes are linked to the base which has to increase in a desired manner. Normally, we look at growth of
13-14% in nominal GDP which broadly is a break up of real GDP and inflation (ideally the GDP deflator). However, if we are looking at a pragmatic combination of 6.5% real GDP growth and 5% wholesale price index growth (which is a better proxy compared with CPI), then a number of 11.5% looks reasonable which can be scaled up by not more than 0.5%.
While this number may be academic, it created challenges during the year as expenditures are planned based on this growth number and constrained by the fiscal space accorded by the fiscal deficit number. And the expenditure cycle is such that the committed ones are reckoned on time while the discretionary ones are kept in abeyance till a reconnaissance is done during the year, when, per force, the latter is cut if things do not work out. Therefore, the first rule is that we need to have a conservative growth target and tune the project expenditure to these collections. As a corollary, the money should be spent from the beginning even if the budgeted amount is small—it can be R30,000 crore instead of R60,000-70,000 crore, but invoking them will make a difference.
The second area is how we estimate the oil price as it has the potential to disrupt the subsidy bill. Last year, the budget looked at something in the range of $ 100-110/barrel. What will it be now? If one looks at the Brent futures price on ICE, for all the contracts through FY16, the average would be around $60 a barrel, which is around $15 higher than what it is today. Intuitively, it can be seen that relative to last year, a price lower by 60% can slice the subsidy bill under ceteris paribus conditions (assuming stable exchange rate too) by this amount which can be close to R25,000 crore. Leaving prices as they are at the retail end is one way to allow for cross subsidisation for kerosene and LPG without compromising on the budget numbers. The second rule can be to leverage the gains from lower oil prices by not lowering retail prices but creating a buffer. This will help in case the calculations go awry in case oil prices increase beyond $ 60/barrel.
The third area concerns disinvestment. We always tend to be bullish on this front in February, but turn bearish through the year which causes the programme to be sub-optimal. The number appears to be more of a residual coming after accounting for various components of the budget by fixing the fiscal deficit ratio at a pre-designated level. At an ideological level, the question often asked is whether this should be a part of the budget to begin with. Curiously, if disinvestment proceeds are excluded from such calculations, then the fiscal deficit numbers would look less attractive. The deficit in FY12 will move from 5.73 to 5.93%, FY13 from 4.85 to 5.11%, FY14 from 4.62% to 4.85% and FY15 from 4.10 to 4.59%.
While it is the prerogative of the government to earn income from any source, a suggestion could be to exclude this component from the budgetary calculations so that the fiscal deficit number can be taken as a clean concept. At the next stage, any disinvestment can be used to earmark capex that will proceed irrespective of what happens on the fiscal front. With the disinvestment rate averaging 0.3% of GDP on an annual basis for the last 5 years, this can be the Keynesian stimulus amount that will go a long way in fixing the infra commitment of the state. This can be the third rule that can be pursued.
The government as usual has to tread the path between fiscal prudence and effectiveness within the contours of the economic environment. Being conservative in defining growth paths and pragmatic in expenditure management could add the necessary delta to make the Budget more convincing. And it is also likely to work well as we do not wait before we act.
The author is chief economist, CARE Ratings. Views are personal