Budget should revive animal spirits

The 2013-14 Budget will be presented at a time when the economy is going through one of its most difficult phases. Growth has slumped, external sector stability indicators such as the current account deficit (CAD) and forex cover for short-term debts have deteriorated, consumer inflation is stubbornly high and animal spirits are down.

In this backdrop, markets and rating agencies will closely watch the deficit figures vis-a-vis 2012-13 Budget projections, as well as the fiscal deficit estimates for 2013-14.

The fiscal deficit numbers were revised upwards to 5.3 per cent, from 5.1 per cent presented in the 2012-13 Budget, after P. Chidambaram assumed charge of the Finance Ministry. Sticking to a fiscal deficit of 5.3 per cent of the GDP will be a challenge, because nominal growth, which serves as the denominator, is likely to be less than what was projected in the 2012-13 Budget. The 2012-13 Budget had forecast a growth rate of 7.6 per cent and an inflation rate of 6.5 per cent for 2012-13.

INVESTMENT INTEREST

The actual numbers would be around 2 percentage points less for growth and around 1 percentage point more for inflation. Thus, nominal GDP growth will be around 13 per cent, rather than 14 per cent assumed in the Budget.

Even if the Finance Minister manages to restrict the fiscal deficit to 5.3 per cent, the quality of fiscal adjustment will be closely watched. Financial markets and rating agencies often turn jittery about India’s high fiscal deficit.

The principal reason for the fiscal deficit is inadequate revenues rather than excess spending. For instance, Central government spending and revenue as a proportion of GDP in 2012 was around 15 per cent and 9 per cent for India, compared with around 24 per cent and 22 per cent for China, respectively. The focus of public debate in India is, therefore, skewed in terms of containing expenditure rather than augmenting revenues.

Chidambaram’s induction as Finance Minister in mid 2012 has been a major plus for the economy. The atmosphere of negativity about India and the threat of a ratings downgrade to junk status have receded significantly, as the government has taken a number of progressive measures at the behest of the Finance Minister.

The most laudable among those initiatives are the formation of the Cabinet Committee on Investment to speed up clearances for large infrastructure projects, increase in price of diesel in an attempt to limit subsidies, and permission for FDI in multi-brand retail. Though markets were expecting some of these measures, the 2012-13 Budget was silent on them. Chidambaram, in his short span in the Finance Ministry, has raised expectations.

The 2012-13 Budget acts as a pointer to what should be avoided, rather than what needs to be done. The retrospective application of tax laws and a piecemeal approach to introduce General Anti-Avoidance Rules (GAAR) from April 2012 did more harm than good. Post-Budget, the government had to expend time and energy in convincing foreign investors about India being a fair politico-economic system.

TAX REFORM

The only progressive measure in the 2012-13 Budget was doing away with the list of services eligible for tax treatment and introducing a negative list for services. It is only proper that the services sector, which now accounts for more than 65 per cent of the GDP and has seen a stable growth of 9-10 per cent in the past few years, should be contributing more to the government coffers.

Initiatives such as GST and DTC, which should have been introduced much earlier, have been delayed for more than three years. Thus, a realistic and resolute schedule for the roll-out of GST and DTC can be expected from the Budget. The Centre and States agreed to a compensation formula for Central Sales Tax a few days back.

GROWTH EXPECTATIONS

The first revised estimates of national income brought out by CSO on January 31, 2013, have lowered the GDP growth estimate for 2011-12 from 6.5 per cent to 6.2 per cent. And, 2012-13 growth will be less than 6 per cent.

The guidance on growth given in the Budget will be closely watched by all stakeholders. The financial savings of households declined from 10.4 per cent of GDP in 2010-11 to 8 per cent of GDP in 2011-12. An increase in financial savings is a must to support growth at a higher level. The Budget should take some measures to increase the attractiveness of financial savings. Since high inflation has been responsible for a drop in financial savings, the government in consultation with the central bank can consider introducing inflation-indexed bonds.

The RBI eased policy rates after a gap of nine months on January 29, 2013. With consumer price inflation at more than 10 per cent and high inflationary expectations, the central bank would be constrained to ease rates aggressively. The Budget will also be watched for measures which will relieve supply-side pressures on inflation. The Finance Minister, at the recently held Delhi Economic Conclave, pointed to the limited space for fiscal expansion to support growth.

The biggest challenge in the present juncture is a revival of growth through an upturn in the investment cycle. In the absence of a direct stimulus, the best the Budget for 2013-14 can do is to announce a few progressive measures which will revive animal spirits in the economy.

(The author is Professor and Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal.)

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