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Mainstream, VOL LI, No 11, March 2, 2013

Union Budget 2013-14: Caught between Various Contradictions

Wednesday 6 March 2013, by Arun Kumar

The Union Budget is the largest single economic event of the year for the nation. It sets the direction for the economy for the coming year. Hence it is keenly watched by the public. The Union Budget for 2013-14 projects an expenditure of 14.6 per cent of the GDP for that year, that is, Rs 16,65,297 crores. This is a huge sum of money and as usual the FM doled it out in dribs and drabs to every politically important section of the nation. In the Part A of his speech which presents the government’s intentions, he mentioned almost all these sections—SCs, STs, minorities, women, youth and so on. The impression created was that it takes care of everyone. But the real question is: what does it do for the economy as a whole and whether it tackles the major problems that the economy currently faces?

 The Finance Minister at the outset identified the problem facing the economy—the difficult macroeconomic situation. Three aspects were mentioned. First, the economy has been rapidly slowing down with the rate of growth falling quarter by quarter in the last more than a year. Secondly, the rate of inflation remains at a high level in spite of all the attempts by the government and Reserve Bank. This high rate is persisting over the last three years, especially in food items, in spite of the high foodgrain reserves. Finally, the Current Account Deficit in the external account of the nation is dangerously high.

In addition, there were two mutually contradictory constraints on the Budget. First, this is possibly the last Budget before the next general elections and the party expected it to have a strongly pro-poor image to garner votes in a very bleak political scenario given its severely tarnished image due to scams and mismanagement of the economy. Secondly, the international agencies are watching hawk-like the performance of the Indian economy from the point of view of the business climate and especially for international finance capital. They want the government to adopt a conservative political stance. The international credit rating agencies have been threatening to lower the rating of the economy because India’s foreign debt ($ 365 billion in September 2012) has been mounting rapidly given the current account deficit. If that were to happen, then in spite of the current high foreign exchange reserves ($ 295 billion in January 2013) of the country, capital may begin to flow out and lead to a sharp devaluation of the currency with consequent problems. There has been a rapid slow-down in the flow of FII and FDI into India.

Thus, the room for manoeuvre for the Finance Minister to give big-ticket concessions to a lot of people (as in the 2008 Budget) was limited. Yet, it can be termed as an election year Budget given that it has not taken the tough steps required to put the economy back on the rails so that it could grow faster. For India a five per cent rate of growth is inadequate in the present development scenario since that results in rising unemployment—a consequence of a high capital intensive development. The concession to elections is that the Budget projects many small give-aways to many sections of the population without giving away any major amounts to anyone which would have dented the macro economic scenario and produced a reaction from the international institutions.

Another concession to the international institutions is that the expansionary policies needed to step up growth have been held in abeyance and instead supply side response is sought to be generated via concessions to the corporates and the stock markets. That is why expenditures were severely curtailed in the present year (2012-13) and are sought to be kept in check in the year 2013-14. The attempt is to not increase direct tax collections rapidly and curtail the fiscal deficit but to cut back on expenditures given that the revenues have fallen short with a slowing economy.

In 2012-13, an optimistic nominal rate of growth of the economy (14 per cent) was projected. At that time also the experts had pointed out that a 7.5 per cent rate of real growth was unrealistic but the government was adamant that this rate of growth would be achieved. Now it is clear that the year is ending with a less than five per cent rate of growth. What is also clear is that all the agencies predicting the economy’s rate of growth—IMF, RBI, ADB, World Bank, private agencies etc.—have been proved to be wrong. The consequence of this incorrect assumption is clear. Revenues have been less than projected by 7.3 per cent. The government is again doing the same by projecting a rate of growth of 13.4 per cent while this is nowhere in sight unless the rate of inflation rises sharply but that will have other adverse consequences and the targets will not be met.

Again due to wrong assumptions, the expenditures in 2012-13 have turned out to be more than projected. The government is forced to show higher expenditures to dress up its image. For instance, 2012-13 is the first year of the 12th Plan and the government wanted to show that it is serious so it projected an increase of 16.8 per cent in the Central Plan outlay over the revised estimates of the previous year. But from the figures now available it is clear that in 2011-12 it ended up spending (Rs 5,08,596 crores), much less than the revised estimates of that year (Rs 5,58,172 crores). Further, the revised estimates of 2012-13 are Rs 5,56,176 crores which is less than the revised estimates of the preceding year. Thus, a comparison of revised estimates shows that in 2012-13, there has been a decline rather than an increase in Plan spending. The actual figure is likely to be even less given the previous year’s experience. Such jugglery with figures seems to be the hallmark of successful Finance Ministers.

A consequence of this kind of creative playing with figures is that the government projects a higher allocation in the Plan for important Ministries like Agriculture, Rural Development, Irrigation and Flood Control, and Tribal Affairs, but ends up spending much less. In each of these cases, the revised estimates of expenditures
(in 2012-13) are less than the actual spent in 2011-12. There is an absolute decline and not an increase. For other important Ministries like the Ministry of Human Resource Development, Ministry of Housing and Urban Poverty Alleviation, Ministry of Women and Child Development and Ministry of Health and Family Welfare, the increase in the revised estimates for 2012-13 over the actual of the 2011-12 is hardly enough to compensate for inflation and as such there is little increase in expenditures for these necessities of the common man in real terms.

In his Budget speech the Finance Minister now claims that he is increasing allocation to each of these Ministries by substantial amounts (to garner brownie points from the public for the coming elections). What he is showing is that over the much lower revised figures of expenditures in 2012-13 he will increase the allocations substantially in the coming year 2013-14. This is the usual jugglery adopted in the recent past and that is why the budgetary arithmetic turns out to be incorrect.

 One of the unintended consequences of all this is that when the revenues of the Centre fall short then the transfers to the States also become less since they get 32 per cent of the Central tax collections. The reduction in 2012-13 is Rs 32,000 crores. This makes the position of the States difficult and they also cut back from key social sector expenditures. Since they are the major spenders on the social sectors, this worsens the position of the marginalised sections who depend more on the State expenditures. No wonder, we are unable to achieve the target of six per cent of expenditures on education and so on. The Financé Minister has also promised to revamp the transfers to the States by changing the criterion and some backward States’ CMs seem to be happy with this. But unless the pie increases there may be only internal redistribution with some States losing out to others.

The Finance Minister has increased the tax on those earning more than Rs 1 crore per annum (42,800 in number) by three per cent by imposing a surcharge of 10 per cent on the tax they pay. This would garner, along with other items of increased tax on luxuries, about Rs 14,000 crores. But, this section benefits the most from the Budget since the tax expenditures (taxes that should have been collected but are not, due to concessions) will rise by Rs 40,000 crores. Thus, the earlier statement by the Finance Minister that the super rich should pay more taxes comes to naught. There is also no increase in either the wealth tax or the estate duty.

To increase the revenue it was important to tackle the black economy and get additional resources but the Finance Minister has done little on this in spite of having received the reports from the three institutes that were charged with the task of analysing the black economy. The postponement of implementation of GAAR to 2016 is a sop to the corporates and foreign entities. The changes in the secrecy provisions of funds routed through Mauritius and other tax havens were diluted immediately after announcement in the Budget because of the reaction in the stock market. All this makes clear that the government is not serious about tackling the black economy. But this one step is the key to tackling inflation, improving governance, increasing the growth rate of the economy and checking the outflow of funds causing the BOP crisis at present.

In brief, the Finance Minister has missed the chance to correct the macro economic imbalance that afflicts the economy according to his own analysis. It is clear that there is much confusion in the Union Budget 2013-14 which has fallen between several stools and will not be able to give a clear direction to the economy apart from not disturbing the corporates and foreign investors. The aam aadmi, in whose name the Congress-I asked for vote, has once again been marginalised.

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail: arunkumar@mail.jnu.ac.in/nuramarku @gmail.com

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