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Indian Budget

Mainstream, VOL LI, No 15, March 30, 2013

Primacy of Fiscal Deficit in 
Indian Budget

Sunday 7 April 2013

by K.S. Chalam

Ever since the Whig Prime Minister Robert Walpole referred to the Budget opening the leather bag in British Parliament in 1733, the term became popular throughout the world about an annual financial exercise. The first Budget in our country was presented for seven- and-a-half months in November 1947. The Constitution has made special provisions for the presentation of the annual financial statement (Budget) in Parliament. It has under-gone far-reaching changes in the Budget speech of Finance Minister starting with a few pages to that of volumes in print, comprising different aspects of revenue and expenditure and other matters. The latest is about the ‘Fiscal Policy Strategy Statement’ presented by Chidambaram along with other Budget papers, appears to be the continuation of a new structure initiated in 2005.

There was hardly an occasion to look at fiscal deficit except the overall Budget deficit of excess expenditure over revenue immediately after independence. The federal structure of the country and the separation of functions between the Union and States along with the division of resources are clearly laid in the Constitution. Of course, they are increasingly becoming contentious with growing aspirations of provincial groups and parties. In fact, the liberalisation of the economy has further strengthened these divisions with regional satraps wielding more power. However, the Central leadership and the Union Government have been trying to resolve some of these issues with the existing institutional structures of fiscal federalism. But, a new regime of fiscal prudence with measurable indicators was brought into the jargon of our Budgets from 1991. It is noted that “a more complete measure of macroeconomic imbalance used internationally is the concept of gross fiscal deficit which reckons the total resource gap in terms of excess of total Government expenditure over revenue receipts and grants. This concept fully reflects the indebtedness of the Government”. This shows the philosophy behind the concept and the conditions of fiscal profligacy of the period resulting in the alleged crisis in Balance of Payments.

Expertise in Public Finance is not a pre- condition for Budget-making as the trajectory of a Budget is decided prior to its presentation. It seems three important quantitative indicators now dominate the field: The Rating agencies, SENSEX and the Fiscal deficit. A new piece of legislation was also brought in 2003 known as FRBM and amended in 2012. Some of the parliamentarians who talk about the defects or merits of the Budgets appear to be unfamiliar with the constitutional provisions in Articles 107 to 117. Are they not infringed? For instance, six important policy modifications were made to give primacy to Fiscal Deficit to arrive at five per cent of the GDP in 1991. They are: 1. reduction in the fertiliser subsidy by increasing the average price by 30 per cent; 2. abolition of cash compensatory support for exports; 3. abolition of subsidy on sugar through the PDS; 4. offering 20 per cent government equity in PSEs to public; 5. a 20 per cent increase in the prices of motor spirit and LPG; and 6. adjustment of Tax rates to yield a net revenue of Rs 2500 crores.

The approach of the policy-makers in Delhi appears to be that of a banker and not necessarily that of an economist. A banker looks at the creditworthiness of the loanee (borrower) and not his needs. This is alright for an individual, but can we treat a country like this? However, the World Bank and IMF institutions look at the borrowing country like a customer and prescribe prudential norms. The concept of the Fiscal Deficit is part of that strategy. The Fiscal Deficit is total expenditure of the government (revenue and capital) minus revenue receipts minus loans and other capital receipts, expressed as a proportion of the GDP. It was around seven per cent before 1991 and was brought to 5.4 per cent in 1995-96 and further reduced to 4.4 in 2004-05. It again moved to 5.7 per cent in
2011-12 and is being regulated to get 4.8 per cent in the current Budget. It is noted by the FPSS that “the fiscal policy of 2013-14 has been calibrated with two-fold objective—first, to aid economy in growth revival and second, to bring down the deficit from 2012-13 level so as to leave space for private sector credit as the investment cycle picks up”. There are two other deficits: the revenue deficit consisting of revenue expenditure minus revenue receipts and the primary deficit is fiscal deficit minus interest payments. The two deficits along with capital formation are sufficient to look at the financial health of a domestic economy. No one argues for free ride or advice to sell/mortgage family silver to buy/import Kurkure. But, subsidies have been evolved as sinews of political war.

We have calculated that the gross capital formation of the country as per cent of the GDP was 10.89 per cent in 1950-51, reached 17.24 per cent in 1974-75 and around 20 per cent by
1980-81. The percentage arrived at 26.0 in
1990-91 while the GDP growth was considered small. Strangely, the proportion in 2000-01 came to the pre-reform period at 24.36. The recent Budget report projected it at 35.0 per cent for 2012-13. Similarly, the tax-GDP ratio was highest in the year 1989-90 with 14.2 per cent and has not so far reached that level during the reform period as it stands at 10.4 per cent.

The policy-makers are found telling us that the way to reduce the Fiscal Deficit is through reduction in government expenditure on subsidies and social sectors as they consider them unproductive. This is only half-truth. There may be leakages in the subsidies and inefficient administration of the schemes, but, has the money gone down the drain? We do not know what the neo-rich, the shareholders of companies etc. do and the reasons for the rise in aggregate demand for the white goods. Yet, the Fiscal Deficit can be reduced without affecting the expenditure by broadening revenue.

Fresh public resources are always found in the knowledge society like 3G/4G or expansion of the service sector and the tax bourgeoning of the capital market and Transactions Tax etc. It is more than two decades now that the state has given enough concessions to these sectors; it is now their turn to contribute to the development of the country. In this context, Chidambaram’s Budget seems to have a mixed bag. He has shown the way to get money but is not courageous enough in touching the super rich who are the beneficiaries of liberalisation. It is noted that the FM has reduced the tax on securities transactions, given exemptions to Securitisation Trusts and paid little attention to commodity markets. It is here that the so-called black money goes in, and the Finance Minister has the moral and legal right to grip it for the good of all. This would help reduce the Fiscal Deficit and ought to satisfy the fiscal fundamentalists.

The author is the former Vice-Chancellor of the Dravidian University.

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