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March 25, 1999
Better than last time, but still a gamble
Finance Minister Yashwant Sinha's second Budget, presented on 27 February, was a distinct improvement over his first Budget proposals announced nine months earlier on June 1, 1998.
By demonstrating a desire to learn from past mistakes, not only has Sinha pleasantly surprised all those who had rather low expectations of his Budget-making abilities, he has also earned a few left-handed compliments from his arch political opponents. The allies and coalition partners of the ruling Bharatiya Janata Party are less adamant than before about turning the Budget proposals upside down this time round.
All of which do not mean that Sinha's Budget would revive the Indian economy or provide a renewed thrust to reforms. Nor does it mean industrial production and trade would pick up dramatically. For that matter, in spite of the symbolic gestures and the promises made, Sinha may not be able to initiate the process of downsizing the bureaucracy and cutting down unproductive government expenditure.
In this Budget, the finance minister has not really been able to reverse a negative trend which has worsened during the Nineties: namely, the trend of the government spending a progressively higher proportion of its borrowings on current consumption expenditure instead of capital investments.
But then Sinha can blame his predecessors for bequeathing him a monster of a problem which seems intractable at present: how to get out of the internal debt trap? In the revised estimates for the current financial year, 1998-99, interest payments as a proportion of the Central government's total tax revenues work out to a little over 48 per cent. The comparable figures would exceed 50 per cent if the Budget projections for 1999-2000 are to be believed.
To the finance minister's credit, he has been able to astutely walk the tightrope in keeping at bay both the hard-liners within the Sangh Parivar (read Swadeshi Jagran Manch) as well as the gang of gung-ho liberalisers (to which external affairs minister Jaswant Singh is supposed to belong). While trying to please everybody, Sinha could have ended up pleasing nobody. Instead, he has sought to spread the unhappiness evenly.
The Budget is thus neither excessively protectionist to pander to the wishes of the proponents of Swadeshi. Nor is it aimed at telling those who assemble every year at the Swiss ski resort of Davos that India is opening her doors wider to the rest of the world. In essence, since the options before Sinha were rather limited, he has sought to play it safe and make the right noises.
It was an excellent public relations exercise on the part of the finance minister to prepare all and sundry for a "hard" if not a "harsh" Budget. That way, he knew he would receive kudos for whatever few sops he would announce. Having stated this, it must be emphasised that the rationalisation of excise duties done by Sinha is unequivocally the most significant positive feature of the Budget.
The stock markets reacted favourably to the Budget with the 30-scrip Sensitive Index of the Bombay Stock Exchange going up by nearly 13 per cent in the first week of March. The corporate sector has also welcomed the RBI's decision to pare interest rates which was announced soon after the Budget. This, to an extent, mitigates the unhappiness expressed by corporates over the hike in the income rates applicable to companies from 35 per cent to 38.5 per cent.
On the negative side, it is doubtful whether Sinha will succeed in carrying through the fiscal correction that has been promised. The manner in which the government has raised resources through disinvestment of shares of public sector undertakings and the way in which these funds have been deployed, has left a large number of questions unanswered.
Sinha may not have been unduly optimistic by implicitly assuming that during the next financial year, 1999-2000, inflation, as measured by the wholesale price index, would be controlled at seven per cent and the real rate of growth of the economy would be around 6.5 per cent. But he would need lots and lots of luck to achieve these targets.
Like many of his predecessors, Sinha has tended to overestimate revenues and underestimate expenditure. The task ahead is stupendous, particularly so in view of the uncertain state of the Indian polity.
Can deficits be cut?
Yes. Manmohan Singh demonstrated that this was possible in 1991-92. But the country was going through an unprecedented Balance of Payments crisis at that time. Foreign currency reserves had plunged to US $ 5 billion, equal to less than a month's import. The situation is quite different at present: India's hard currency reserves are in excess of US $ 30 billion which would take care of seven months' imports.
Between 1990-91 and 1991-92, the government's fiscal deficit as a percentage of gross domestic product came down from 7.7 per cent to 5.6 per cent. In the following two years, 1995-96 and 1996-97, this proportion came down further to 4.9 per cent and 4.7 per cent. Thereafter, this figure has risen.
Manmohan Singh could compress the fiscal deficit as a percentage of GDP because of a variety of factors, not least on account of pressure from the International Monetary Fund. The manner in which the deficit was cut had been (and continues to be) criticised, for it reduced the government's spending on social services like education and health as well as capital expenditure.
Cutting down the fiscal deficit, argue economists (and the IMF too having the benefit of hindsight), should not be an end in itself. So long as the government borrows to build assets for the future, a higher fiscal deficit need not bring about inflationary pressures. The area of concern has been (and remains) the revenue deficit which is the gap between the government's total expenditure and total revenue receipts.
The revenue deficit as a percentage of GDP came down only marginally from 3.2 per cent in 1990-91 to 3 per cent and 2.4 per cent in the next two years, the period during which the fiscal deficit was slashed. Since then, the proportion has slowly but steadily inched back to the 3 per cent level.
Let us look at the comparable figures for the current fiscal year and the next one. The problem this year has been that Central Statistical Organisation has chosen to change its accounting methodology. The base year for computing GDP at constant prices has been changed from 1980-81 to 1993-94. The CSO has also sought to "improve" its coverage by including the output of the unorganised sector which had earlier resulted in GDP being underestimated.
The government insists that the CSO's decision to revive its statistics in early-February was purely "accidental" and not aimed at making the economy appear healthier than it actually is. Nevertheless, sceptics wonder about the timing of the decision. In addition, this year, the Union government has removed small savings -- three-fourths of which goes to state governments -- from the general Budget.
Taking all these statistical changes into account, if one compares apples with apples and not oranges, the fiscal deficit as a proportion of GDP during the current financial year is expected to rise to 6.5 per cent against the June 1998 Budget target of 5.6 per cent. The following year, 1999-2000, this proportion is slated to come down to 5.8 per cent, which is higher than last year's Budget.
According to pre-Budget Economic Survey, between April and December 1998, the Central government's expenditure went up by 26 per cent (largely on account of payment of higher salaries to government employees) whereas total revenue receipts rose by less than five per cent (excise and customs duty collections were lower than anticipated because of the slowdown in industry and trade). The consequence of expenditure outstripping revenues was that the fiscal deficit rose by a whopping 77 per cent.
Why are high deficits bad for the economy? Simply put, the higher the deficit, the more new money the government is forced to print. Which, in turn, means that more money chases relatively fewer goods, resulting in inflation. This is the real challenge before any finance minister trying to manage the economy. Yashwant Sinha has paid lip service at the altar of lower deficits. But few would be surprised if his calculations go awry, if revenues fail to pick up as expected and expenditure exceeds budgetary expectations.
Courtesy: Sunday magazine
Part II -- Can growth rates pick up?
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