The chatterati on the television screens holding forth on the Finance Minister's presentation of Union Budget 2013-14 seemed to be rather surprised at the reaction of the stock markets.
After all, Chidambaram had given big business lots of presents: continued low excise rates that were first introduced in 2009 as a "temporary" measure in the wake of the global crisis; incentives for infrastructure investment as well as tax rebates for any investment in manufacturing in excess of Rs 100 crore; reductions in securities transactions tax and treating commodity futures the same as equity futures as was desired by equity markets; declarations that GAAR (General Anti-Avoidance Rule - it stops tax evaders from routing their investments through tax havens like Mauritius and Switzerland) is as good as dead; and so on.
It is true that there were some tax increases – a 10 per cent surcharge on the highest income tax bracket (apparently affecting only around 42800 taxpayers) and an increase in the surcharge on taxes paid by companies. But these are really peanuts, scarcely enough to make a dent or even be noticed, especially since effective rates of taxation are still way below nominal tax rates, and the FM even allowed for further exemptions.
Certainly, all the "captains of industry" who came in front of the cameras were at pains to express general approval of the Budget, even awarding it grades ranging from "good" to "excellent".
So why did the Sensex tank despite all this? It may be that investors – or people generally – are smarter than we think. And certainly smarter than the commentators on television, many of whom seemed to have missed some very obvious features of the Budget.
It is true that the FM sought to disguise what he was really doing by creating a miasma of details that left everyone's heads spinning.
He has clearly decided that fiscal consolidation – or at least the impression of it – is all that matters, in order to appease foreign investors and claim that at least he is a model of "fiscal rectitude".
The need to impress the global "epistemic community", consisting of agents of international capital and big business generally as well as other mainstream figures who all share the view that fiscal rectitude is always desirable and the only deficits that can be tolerated are privately generated ones. This took priority over the need to placate his own party and others in the Indian political establishment who are concerned at how the announcements he makes in this Budget speech and related economic policies will affect the common people of the country - and thereby the electorate that will go to polls in a general election in about a year.
But in fact the macroeconomic implications of his chosen strategy of fiscal consolidation at all costs are going to be very severe for ordinary people.
The approach seems to be that showing some amount of fiscal consolidation is essential, that this can only be achieved through cutbacks in spending (regardless of how this translates into supply shortages or higher inflation in future) and that growth will miraculously return once private investors (both domestic and foreign) are persuaded that fiscal deficits will be kept in check.
The positive role that public spending plays – in providing essential infrastructure that is the basis for future growth, in improving the conditions of life and productivity of the people as a whole, in generating internal demand at a time when external demand is problematic, and in ensuring some stability in the prices of essential items of mass consumption – all these have simply been ignored.
Consider what has been achieved in the current fiscal year: containment of the fiscal deficit to an "acceptable" level of 5.2% of GDP, essentially by sharp reductions in much-needed Plan spending. The revised estimates for the current fiscal year show that Plan spending was nearly 20% below the budget estimates for 2012-13.
This was effected by across the board cuts in all the major sectors, including those that directly affect the livelihood and well-being of the people. Some sectors suffered severe cuts, with unintended consequences that we may have yet to experience – for example, actual plan spending on irrigation and flood control is estimated to be only one-third of the budget amount, while important sectors like industry and minerals, science and technology and communications also suffered deep cuts.
Even agriculture, rural development and social services (health and education) experienced sharp cuts in comparison to budget allocations.
But the proposed Budget is slightly more cynical in its approach to fiscal consolidation.
To begin with, there are fairly extravagant claims about future tax collections on the basis of very minor increases in some taxes (with even the most optimistic self-assessment suggesting additional resource mobilisation of only Rs 18000 crore in total). Despite this, the FM has budgeted for a significant increase in tax collection of 19%, even though nominal GDP is projected to increase by only 12.9%.
It is hard to understand such a buoyant prediction, especially when the current year already shows a significant shortfall of more than 5% of actual tax collections over the budgeted amount.
Meanwhile, while Plan outlays have been increased slightly over the low revised estimates of the current year, they show hardly any increase when compared to the budget estimates for the current year.
If anything, this Budget is slightly worse than previous ones because it assumes very little increase in actual spending on social services compared to the current year's Budget outlays. Even those amounts were not spent fully – there are massive shortfalls in Plan spending across all sectors including social spending – because the FM had already tightened the screws on such expenditure by the middle of this year. But the projected increases are really small.
Thus the food subsidy is supposed to increase by only Rs 5000 crore to Rs 90000 crore, even though the Centre still plans to bring in the food security bill.
Education spending has also been suppressed. The outlay for school education is only 8 per cent more than the current year's budget estimate and 15 per cent higher than actual spending this year, which means it will just barely increase as a share of nominal GDP.
Ditto for health spending: while the increase of budgeted outlay over revised actual spending seems high (28%) in fact the increase compared to the previous year's budget is only 8%. So it remains to be seen how much new spending is actually allowed even in something as essential as health.
The supposedly flagship programme MNREGA (Mahatma Gandhi National Rural Employment Gurantee Act) has been allocated Rs 33000 crore – exactly the same as the current year's allocation, which means a significant decline in real constant price terms. Across the board there is this niggardly approach to essential public spending.
All this is made much worse by the fact that another little noticed feature of this year's budget which will significantly increase inflation.
The total subsidy bill is to be brought down by more than Rs 26000 crore – almost entirely on account on reduced outlays on fuel subsidies.
While global energy prices still ruling very high, this can only mean that the central government is preparing to force Indian consumers to pay global prices for fuel, even though per capita incomes are only a small fraction of the global average. Since fuel is a universal intermediate, this is bound to affect all other prices, including those of essential goods and services like food, transport and so on. And so this is an aggressively inflationary move, which is more than surprising if the government is truly concerned about containing inflation and particularly food prices, or about delivering food security to the people.
Overall, therefore, this Budget will not deliver growth because it is getting into fiscal contraction at a time of already slowing growth, when private investment is unlikely to take up the slack. And it will add to inflation because of the impact on energy prices and because its own lack of investment will affect supply shortages.
Renowned economist Dr Jayati Ghosh is the Professor of Economics at the Jawaharlal Nehru University in New Delhi. She is also a member of the National Knowledge Commission set up by the Indian Prime Minister.
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