The “farewell Budget” was revealed on Monday, an elegy to a decade of populist patronage. The finance minister expounded on his efforts to conduct fiscal consolidation, ensure price stability and revive growth. He also wrote the obituary on a decade of fiscal mismanagement.
India is a complicated economy, affected by an idiosyncratic logistical system and the vagaries of the monsoon far more than the dissolution of the US housing market. During the height of the financial crisis, this government proudly cited our strong internal dynamics, with external trade at ~20 per cent of GDP, strong remittances and growing rural markets.
Now, we cite the impact of the tapering, the financial crisis — last heard in 2008 — and slow growth in our trading partners as the reason for our fading growth prospects. Successful navigation of this tumultuous macroeconomic period has meant low growth, high inflation and a volatile currency. For this government, stagflation, unlike growth, has many fathers.
Fiscal deficits do not matter
The progressive Fiscal Responsibility and Budget Management Act, 2003, required the government of India to eliminate revenue deficit by 2009-10 (0.5 per cent of GDP reduction annually), while progressively reducing the annual fiscal deficit (ceiling of 3 per cent of GDP, 0.3 per cent of GDP reduction annually) and with total debt cut to 9 per cent of GDP (1 per cent reduction annually).
The Reserve Bank of India (RBI) was supposed to stop purchasing government bonds by 2006. Given this context, the current fiscal deficit is cited at 4.6 per cent, the RBI has reportedly been asked for an “interim” payment to fudge the fiscal deficit and our total external debt stands at $400 billion.
We have to pay around $172 billion of shortterm debt by end-March 2014, compared to ~$55 billion in March 2008. This covers nearly 60 per cent of our foreign exchange reserves, exposing us to FII volatility. Even our purported fiscal reduction was a classic Peter-and-Paul analogy, with disinvestment programmes and bank recapitalisation initiatives funded by the likes of LIC and Coal India.
Potentially growth-inducing capital and infrastructure spending was cut while sparing mistargeted subsidies. The insipid disinvestment programme, asking ONGC to buy 5 per cent of IOC, was a hash of intergovernmental transfers.
In a vain example of fiscal profligacy, the 3 per cent target is left to the next government, along with payment for certain fuel subsidies (potentiallyRs 35,000 crore) and rolling back its legacy of corruption. Actual fiscal correction lies far, far away.
Our subsidy culture continues with total spending on food, fertilisers and fuel atRs 2.5 trillion in 2014-15. Fuel subsidies continue to be hidden from the public, with the likes of ONGC, Oil India and Gail sharing about 40 per cent of the burden.
Seen over the past decade, upperclass subsidies (fuel and fertilisers) along with food went up nearly three to four times, with spending rising from Rs 5 lakh crore in 2004-05 to Rs 16.6 lakh crore in 2013-14. The pilferage at public sector banks was augmented, with UBI’s NPAs soaring to around 10 per cent of its total loans.
While India’s sovereign rating barely hangs on to a cut above junk (an apparent achievement for this government), our public sector banks are being derated rapidly — a consequence of the UPA’sRs 70,000-crore debt-relief schemes. The government will offer recapitalisation to the tune of Rs 11,200 crore, with PSU banks sitting on estimated NPAs of Rs 2.1 trillion.
Financial analysts speculate that banks might have to write off nearly Rs 3.5-4 lakh crore of this over the next few years. The credibility and viability of our banking sector is at stake.
Finally, this Budget panders to the voting blocs, by reducing excise duty on scooters, small cars and mobile phones till June, while offering notable loan relief for students and an enactment of the “one-rankone-pension” scheme (recommended nearly a decade ago) — neatly targeting youth, women and the defence community.
Policy instability, a dismal decade
The Budget offers no direction for the economy or the entrepreneurs driving its growth. It offered limited panacea to our hard-working farmers, while taking credit for their achievements, along with a bountiful monsoon, in production targets (such as sugarcane), against heavy institutional headwinds.
The manufacturing sector suffered blackouts, limited policy incentives and labour disputes, along with market and hiring barriers. Yet, its declining investment trend, an expression of low business confidence, was blamed for declining growth.
The hyped National Manufacturing Policy, with three new unfunded industrial corridors, is a reflection of this government’s propensity to issue white papers, without implementation. Policy instability has been the hallmark of the past decade, whether in tax rulings or oil and gas exploration regulations.
Denying this policy paralysis that led to macroeconomic instability is in keeping with a government whose policies have led to a rising fiscal deficits, high inflation, low growth rates, unconstrained current account deficits and volatile exchange rates; all leading to blocked projects and investments. The finance minister spoke about “walking the last mile”. For this government, and its profligate culture, indeed, he did.