On February 17, 2014, Finance Minister P Chidambaram placed before Parliament the Interim Budget for 2014-15. The Interim Budget is meant for formally authorising government expenditure, pending the presentation of a regular Budget after the general elections.
The Revised Estimates (RE) for 2013-14 indicates that the fiscal deficit could be ₹5,24,539 crore (4.6 per cent of GDP) as against the much discussed Red Line of 4.8 per of GDP. The absolute difference between 4.8 per cent and 4.6 per cent of GDP is less than ₹23,000 crore.
These numbers are less important than the measures resorted to for adhering to the Red Line. It is well known that there have been major shortfalls in the release of subsidies — fuel, fertilisers and food — which are thrown forward to 2014-15.
Also, there has been blatant recourse to interim dividends by PSUs in 2013-14. Again, the Budget Estimates (BE) for 2013-14 show substantial increase in non-tax revenues and substantial reduction in Plan expenditure.
The BE for 2014-15 is, in a sense, notional in that it is set out merely to enable the present government to meet expenditures pending the regular Budget.
The adjustments undertaken to achieve the fiscal deficit target for 2013-14 renders it that much more difficult for the Regular Budget for 2014-15.
According to the Interim Budget, revenue receipts could be 13.4 per cent higher than the RE for 2013-14. Again, total expenditure in the Interim Budget would be only 10.9 per cent above the BE for 2013-14.
This then results in a fiscal deficit in 2014-15 of 4.1 per cent of GDP. Given the throw forward of expenditure from 2013-14 and the advance transfer of profits by PSUs, adhering to the Interim Budget figures in the regular Budget for 2014-15 would be a stupendous task.
Deterioration in the regular Budget for 2014-15 would invite unfair criticism of the new government.Taxes and capital
The choice of items on which indirect taxes have been reduced in the Interim Budget does raise eyebrows. Relief granted to the automobile industry by way of reduction in excise duties, particularly for SUVs, point to a political economy trade-off.
A whole range of capital goods, consumer durables and non-durables will also benefit from lower excise duties.
In 2014-15, the government will infuse ₹11,200 crore into PSBs. Across the political spectrum, there is agreement that the 51 per cent minimum government holding in PSBs should not be reduced.
Under the present dispensation, there is disproportionately larger allocation of capital to weaker banks. This results in the system as a whole veering to the weakest banks.
To strengthen the PSB system, more capital should be allocated to the stronger banks and the weaker banks would have to veer to narrow banking under which they would invest most of their resources in government paper.
But political economy constraints require that the weaker banks be allowed to grow with government support by way of capital infusion. All this points to a sub-optimal system. While there is little that is of concern in the Interim Budget, the obiter dicta is a cause of great anxiety.
The setting up of a separate public debt management agency (PDMA) has been discussed since 1997. While the concept is sound in that monetary policy and internal debt management need to be kept separate, the hard reality is that the government borrowing programme is heavily dependent on the RBI support.A tough proposition
The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the setting up of the PDMA. Once it is set up, the PDMA cannot depend on the RBI’s Open Market Operations (OMO) to bail out the borrowing programme.
The fact is that, in recent years, the RBI has been supporting the borrowing programme through its OMO to the extent of one-third of the borrowing programme.
The government needs to understand that once a PDMA is set up as an independent agency, there would be no question of the RBI supporting the borrowing programme. The way the FSLRC envisages the PDMA, the RBI would be represented on both the PDMA executive council as also its management committee.
Further, the FSLRC envisages that all decisions of the PDMA should be unanimous. Once the RBI is a party to the PDMA decisions, it will have to ensure that the government borrowing is put through at the rate of interest at which the government wants to borrow.
Far from separating the monetary policy from internal debt operations, the FSLRC proposal makes the RBI subservient to the PDMA.
In the Interim Budget Speech, the Finance Minister has advocated that the PDMA should be set up as a non-statutory body and be made operative in 2014-15.
The FSLRC proposal is a retrograde step and the setting up of a non-statutory PDMA and making it operative would be a de facto bypassing of Parliament on a matter of vital legislation.
In 2014-15, there are large redemptions and it can no longer be assumed that all repayments will be automatically rolled over by way of fresh investments.
Decisions on a PDMA should quite properly be left to the in-coming government in the regular Budget.
The Interim Budget has implemented the one rank-one pension scheme for the defence services. The treatment meted out by government to RBI pensioners is nothing short of a brutality.
The RBI Board should be the final authority in deciding RBI salaries and pensions. Should a borrower have the authority to decide the salary and pensions of its banker? Allowing this goes against the grain of natural justice.