Success achieved by the Indian economy, as highlighted in the recent Budget of the central government, rests on four pillars, which include current GDP growth rate at 7.6 per cent, drop in inflation (as measured by the CPI index) at around 6 per cent, a record stock of official reserves at $350 billion and most importantly, a reduced fiscal deficit at 3.5 per cent of current GDP.

Looking beyond the official figures, one comes across reservations. First, the GDP growth, calculated by the earlier method so long followed, generates a rate of around 5 per cent and no more.

Second, the stock of official reserves has much to do with inflows of short term and volatile capital flows, which may evaporate without much warning.

Third, the current comfortable level of inflation may also not last very long if the current lows in oil and commodity prices reverse.

Finally, the approach of achieving growth via financial stability – of achieving a reduction in the ratio of fiscal deficit to the GDP – does not stand up to scrutiny.

Misplaced deficit concern Let’s spell out what a reduced fiscal deficit implies for the economy. Unlike the earlier practice of meeting the deficit with money printed by the Reserve Bank with the consent of the government, the gap now can only be met by additional borrowings of the state from the capital market.

Incidentally, that too is considered ‘harmful’ in terms of what is considered as ‘prudent’ fiscal practices, with state borrowings likely to pre-empt borrowings by private agencies.

As for the fiscal deficit which is necessarily funded with market borrowings, it simultaneously generates fiscal liabilities in terms of interest payments. In addition to the fiscal deficit, the budget document provides two more estimates of the deficit.

Of the latter the ‘primary deficit’ is arrived at by deducting interest payments from the fiscal balance. With the fiscal deficit at 3.5 per cent and interest payments alone accounting for 3.3 per cent of GDP, the estimated primary deficit comes to less than 0.3 per cent of GDP.

This, going by the major heads of expenditure in the primary budget, would imply cuts in social sector spending and capital expenditure, the two major heads of spending in the primary budget other than defence. It is little surprise that subsidies on food are less than 0.9 per cent of GDP.

What then does the budget offer for the economy in general? Adherence to the fiscal deficit target may project financial stability and a better investment climate to those who have faith in the magical consequences of a smaller deficit on inflation and its conducive effects on investment.

It is, however, another matter that reduced public spending as a result of cuts in fiscal deficit may actually turn out to be a dampening factor for investment.

Oblivious to headwinds While recognising the uncertain as well as the depressive trends in the global economy, which could disrupt the domestic economy, the Budget seeks to instil confidence by taking comfort in ‘a path of macro-economic stability’ in India.

This is meant to be achieved through non-inflationary growth. No firewall has been conceived to counter the current and future shocks to the economy.

The threats may arise from a sudden withdrawal of speculatory and short term capital flows, as in the case of the recent turmoil in global financial markets and the turbulence in Chinese stocks and currency. There has been no attempt to prepare the economy to weather further shortfalls in export earnings, along with the rise in protectionism, coupled with the recession, in the global economy.

Thus, it seems disconcerting that, notwithstanding the vagaries of global finance, the Budget announces further opening of the financial market. It has offered schemes for new derivatives to be launched by the Security and Exchange Board of India (SEBI), and options for insurance companies to invest in stock markets.

The moves are in accord with the on-going facilitation at an official level to push risk-taking in the markets, which include the use of derivatives like futures as hedging instruments. There is little, if any concern, on the part of the government to arrest the speculation in stocks, property, currency and even in commodities.

The economy today is dominated by finance, which has little to do with the real economy of output and jobs. With uncertain markets generating the need to hedge financial assets by using derivative instruments like futures, options and swaps, the gains and losses arising from them are like transfers across the economy which do not account for changes the GDP.

A rise in stock market transactions which pushes up stock indices like the Sensex thus has no reason to be associated with a simultaneous or a lagged response to a rising GDP in the real economy.

Speculation in uncertain markets is responsible for the growing incidence of NPAs in the PSUs and the large number of scams in the economy.

The Budget is remarkably tolerant of those developments, as can be gathered by its enthusiasm for further opening the floodgates of speculation in the economy. Nor is it preparing the economy against job losses in the event of further shortfalls in exports.

Do we then brand the recent Budget as one more attempt to achieve so-called ‘financial stability’ at the cost of the real economy?

The writer is a former professor of economics in JNU