The budget is the most important economic statement of the government. Over the years, it has ceased to be a mere statement of revenue and expenditure but also conveys the thrust of the government’s macro-economic policies.
As everyone knows, the Finance Minister presents the budget at the end of February. This allows sufficient time for Parliament to debate and approve the budget proposals for the financial year commencing April 1.
The budget process for fiscal 2014-15 will be different from any normal year. An interim budget was presented by P. Chidambaram in February. Essentially, in the nature of a vote on account, the interim budget was intended to get Parliament approval for expenditure that will be incurred during the first few months of fiscal year 2015. This is meant to accommodate the election schedule and the formation of a new government, whose urgent task it will be to present a “full “ budget by July for 2014-15.
The new finance minister will be constrained by time. The budget exercise usually starts months ahead of its actual presentation (in February). This time that luxury will simply not be available. The finance minister will have very little time to nominate and get acquainted with key officials who will be responsible for the budget preparation.
All these suggest that the first budget of the new government, whatever be its predilections, would substantially resemble the interim budget of February. There will not be any time to prepare a fresh set of numbers, different from the interim budget. For very practical reasons, the new government will stick to the projections of expenditure and revenue in the interim budget.
Yet, there is something special about the first budget of a new government, which, if opinion polls are correct, will be formed by a political combination that will be different from the one that has been in power for a decade. The July budget will be keenly watched for the likely course of fiscal policy over the next five years.
The very large expectations raised by political parties will challenge the new finance minister.
There is no doubt that some of those expectations are overblown. Like those from the foreign institutional investors who have pumped in large sums of money into the stock market. If the poll results do not vindicate their optimism in a Modi-led NDA government how will they react? Many other sections of society — industrialists and common man alike — clamour for a government which is ‘decisive’. Will such expectations be partially at least met in July?
Game changer this budget may not be but the Finance Minister would do well to lay the framework for a more transparent budgetary mechanism that will involve some honest accounting.
The next round of official national income statistics (GDP) will be available only in early June. The Reserve Bank of India’s (RBI) next review of monetary policy will be released by that time. Inflation data — both CPI and WPI — will be released by the middle of this month. Whatever statistics that have been released do not present a particularly flattering picture of the economy although most forecasters think that the economy is on the mend and that GDP (gross domestic product) growth will finally move out of the sub-5 per cent growth trajectory during the current year.
The validity of election-eve official claims will come under scrutiny. Mr. Chidambaram has claimed that he is leaving behind an economy in good health. The current account deficit which threatened macro-economic stability last year has come down to very manageable levels (from around 4.7 per cent of GDP last year it is projected to come down to below 2 per cent).
On fiscal deficit, the government has claimed credit. The Finance Minister has said that on no account will the deficit breach the self-imposed red-line and that the interim budget’s estimate of the deficit at 4.6 per cent of GDP will hold good.
On the face of it, the success claimed in addressing the twin deficits is remarkable. Yet, in both, it is not the actual numbers so much as how they were achieved that matters. The current account deficit (CAD) has come down essentially because of the government clampdown on gold imports.
The restrictions on gold imports cannot continue indefinitely. Already a large portion of the bullion trade has shifted underground. Besides, a healthy reduction of the CAD is best achieved through increased exports and not through imports reduction. It is noteworthy that non-oil imports too have fallen, not a good sign because it indicates a continuing slowdown.
Much will be said about the other ‘achievement’ of the UPA-II government in fiscal consolidation. Here again, it is the quality of fiscal contraction that matters. It is not healthy to cut Plan expenditure or shift subsidy payments to the next accounting period or claim revenues that strictly accrue during the next year.
None of the above blemishes in fiscal management are special to the UPA II’s ways of managing public finance.
Yet, when claimed as big achievements during election time, they do require special scrutiny.
The next finance minister should sift the dodgy numbers from the genuine ones and overhaul fiscal policy.
narasimhan.crl@thehindu.co.in
