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Budget numbers: Full of sound and fury

By Jaimini Bhagwati
March 17, 2016 11:31 IST
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The image is used for representational purpose only.


In the Indian context, it is the gross primary deficit rather than the fiscal deficit that should be more in focus, rues Jaimini Bhagwati

The homeless and unwashed sleep under flyovers and approach us with outstretched palms at traffic lights even in the exclusive enclaves of Delhi.

As we Indians know from personal experience, basic security, health care, clean drinking water or electricity are not available to about 300 million of our citizens.

There are none so blind, as those who will not see.

It is axiomatic that high fiscal deficits raise inflation which hits the lowest income and salaried classes the most.

And, it is logical for governments to restrict Budget deficits, since that reduces crowding out of private borrowings.

In the build-up to the presentation of the Budget on 29 February, the spotlight was on whether the central government would adhere to a fiscal deficit target of 3.5 per cent of GDP for 2016-17.

The government stuck to its word.

However, the relevance of this 3.5 number is diluted by the central government’s practice of finding ways to provide for expenditures outside the Budget.

This practice, quaintly called “cash neutral” in the Indian Ministry of Finance, consists of issuing bonds/guarantees instead of making payments.

The consequent actual and contingent liabilities are not part of the Budget and the amounts vary from one year to another.

Additionally, the 2016-17 Budget has not fully taken into account the inevitable outlays, even if staggered, of the Seventh Pay Commission’s recommendations and OROP.

Food Corporation of India and publicly owned fertiliser companies are owed large amounts by the central government.

Further, funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget.

Net debt redemptions on government bonds change considerably from year to year since principal repayments can be lumpy.

The differences in principal amounts due are at times more than 0.4 per cent of GDP (fiscal deficit target of 3.9 per cent for 2015-16 minus a 3.5 per cent target in 2016-17).

Principal redemptions on government bonds in 2017-18 are more than the comparable amount in 2016-17 by Rs 84,000 crore (Source: RBI).

This amounts to about 0.6 per cent of the projected GDP for 2015-16. In the Indian context, it is the gross primary deficit rather than the fiscal deficit that should be more in focus.

Assuming that the government and the RBI are on the same page about the non-inflationary nature of Budget 2016-17 and the repo rate comes down by even one per cent, the question is whether private investment would rise.

Consumer loans should get a boost.

However, there is a backlog of stalled infrastructure and other large projects and some private firms cannot meet their debt obligations.

It is unlikely, therefore, that large private investments would be forthcoming for long-gestation, employment-enhancing road or bridge projects because of existing high corporate leverage.

At the end of 2015, investments made by foreign institutional investors in government bonds amounted to Rs 1,52,700 crore and total external commercial borrowings stood at approximately $182 billion.

FIIs naturally favour higher returns on rupee denominated stocks/fixed income instruments and ECB borrowers with rupee revenues have a currency mismatch in servicing hard currency denominated borrowings.

Consequently, these two categories of financial sector heavy muscle benefit if the rupee were to appreciate rather than depreciate.

It is small wonder that the powers that be have winked at rupee overvaluation which is around 15 per cent, over the last 12 years, in trade weighted real effective exchange rate terms.

Even though there are leakages, the Indian government should and does provide subsidies meant for the poorest.

For continued domestic and international forbearance, cash subsidies need to reach intended beneficiaries.

The underemployed are restive and social harmony is at risk.

The government has to convince those at lower socio-economic levels that it has budgeted for policies which would help in a sustainable manner.

The Budget for 2016-17 has provided for rural roads and irrigation.

However, the amounts allocated for capital expenditure should have been higher, focussed on lifting the bottom 25 per cent of the population out of their wretched living conditions within the next five years.

The overriding concern has to be about rising distress in rural areas as amply evidenced by sharply reduced demand.

That is, speedier development of India’s infrastructure and widening of employment opportunities, for those who can no longer be absorbed in the agriculture sector, should have been the overwhelming focus of the Budget.

Given lower demand in China and near recessionary conditions in Europe and Japan, oil prices are likely to remain at current levels for the next few years.

Consequently, inflationary pressures from foreign sources are at their lowest and likely to remain so for the next few years.

Given this relatively sweet spot that India is in, government should have budgeted explicitly for higher expenditure, perhaps one more per cent of GDP, on building roads, bridges and ports.

Of course, government would need to use professionals to evaluate costs and bid out project execution transparently and competitively to the private sector.

Shortage of resources is an issue and government could think of amending/repealing the LIC Act and divesting 20 per cent of LIC. LIC’s market capitalisation should be around Rs 6 lakh crore (Rs 6 trillion).

If the government is prepared to bite the bullet on this one it should also divest more of Coal India and part of Air India.

Air India divestment would not yield much but would inject greater accountability into this airline.

Currently, the media and others are competing to vilify Vijay Mallya.

At a court hearing, Mr Mallya’s lawyer commented wryly that while his client has defaulted on loans, there seems to be no scrutiny of those who have defaulted on much larger amounts.

This is pertinent and there are huge budgetary implications.

It is difficult for elected governments anywhere to be genuinely mindful of the long term.

To sum up, the Budget of 29 February tilted more than it should have towards the shorter term.

The image is used for representational purpose only. Photograph: Reuters

Jaimini Bhagwati is a professor at ICRIER. Views are personal.

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