Financial Scene C.R.L. Narasimhan

Beyond the interim budget

Days after the interim budget, there have been question marks over the accuracy of its key numbers. For instance, the fiscal deficit numbers, both for the current year (2013-14) and the next year (2014-15) at 4.6 per cent and 4.1 per cent, respectively, are, in the eyes of rating agencies and brokerages suspect. Fiscal consolidation might well take place this year, in fact, the deficit is expected to be even better than the “red line: of 4.8 per cent (of GDP) which the Finance Minister had promised will not be breached.

The scepticism is on two counts: (a) that a fair bit of window dressing — subsidies getting rolled over into next year and taking credit for dividends that would normally accrue next year — have improved public finance for this year but correspondingly made the task of the next finance minister that much more difficult, (b) more substantial is the criticism that the deficit has been pegged down by cutting down on productive capital expenditure even while leaving the subsidies untouched.

While fiscal consolidation is not the only point on which the interim budget is faulted, it occurs that the whole exercise of dissecting the budget numbers is futile. This has been a vote on account to enable the government to carry on with its ongoing activities until a new government takes office after the elections.

The usual hype that surrounds a full year’s budget is simply not on and fortunately has been much less this time.

Neither the allocations to various expenditure heads nor the revenue estimations are sacrosanct. A new government even one formed by the present coalition is not bound by these. Besides, any tinkering in the direct taxes can happen only after the new government presents its budget sometime in June-July.

Mission statement

Therefore, what is more important than the budget numbers is the vision statement that forms part of the Finance Minister’s speech.

Most of the ten-odd items are not new but progress on these has been in fits and starts. These items should be non-controversial and above any narrow political considerations.

Fiscal consolidation naturally figures high up — the target is to bring down deficit to 3 per cent of GDP by 2016-17. A new government will pay at least lip service even if it does not stick to a rigid schedule of reduction.

Not fixing public finance can have major negative consequences among other areas on the current account, which is likely to be in deficit in the foreseeable future.

The current account deficit (CAD) now appears manageable. Due to some tight controls on gold imports and spurt in exports, the CAD is expected to be contained at $45 billion around half of what it was last year.

However, no government can afford to rest on its laurels. Gold imports might have come down but the underground trade is flourishing.

Ideally, both exports and imports must continue to grow. Lower imports are not a healthy sign as it correlates with economic slowdown. Sharp reduction in iron ore exports and increases in coal imports reflect policy logjam in these areas and put pressure on the CAD.

RBI’s role

A balance between price stability and growth is necessary. The government as much as the RBI should strive towards a proper balance.

While stating this as a priority item, the Finance Minister is asking for a higher level of coordination with the RBI. Given that the central bank is preparing to focus on inflation as its primary goal, analysts see a continuation of differences between the two in this key area.

Financial sector reforms are another key area. The budget speaks of the need to press ahead the Financial Sector Legislative Reforms Commission’s recommendations. The new Lok Sabha will also have to pass several key bills — relating to insurance, SEBI, that unfortunately could not be enacted now.

Infrastructure development will naturally figure in any vision statement. The subject is vast and unfortunately progress here has been tardy.

Manufacturing ought to be given its due, especially if it is for exports. The Finance Minister has suggested that all taxes, Central and State, that go into an exported product should be waived or rebated.

He also recommended a certain minimum tariff protection for manufacturing. All these, of course, deserve consideration even in the larger context of Centre-State finances and WTO rules.

The budget also suggests that with improving finances, States should be able to beat a portion of costs of implementing flagship programmes so that the Centre can allocate more resources for subjects such as defence and railways that are its exclusive responsibility.

Mr. Chidambaram’s vision statement also covers other subjects — subsidies and urbanisation. In a sense, the statement has become even more relevant because no government, including the present coalition, has come to grips with it.

At the same time, no government can afford not to strive towards achieving these.

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Printable version | Jan 20, 2022 5:36:52 AM |

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