Budget: It's time to boost investment, cut down wasteful spending

budget should raise revenues & reduce spending to increase capital expenditure, without compromising fiscal deficit target excessively, says Jaimini Bhagwati.

It is that time of the year. Newspapers and television channels are in a competitive frenzy making pronouncements on the Union government's Budget, to be presented to Parliament on February 29.

The frantic voices cannot be muted and one remedy is to join the circus.

This article preaches the basics which tend to get obscured, as Macbeth puts it, in all that "sound and fury".

Although India's GDP grew by 7.3 per cent in the last quarter of the calendar year 2015, the index of industrial production (IIP) fell by 1.3 per cent in December 2015.

Again, while the trade deficit has shrunk, exports were down for the 14th straight month in January 2016. And, Indian equity indices are lower by about 20 per cent in the past one year.

In this environment of uncertainty for long-term investors, the strait-jacketed thinking is that the finance ministry should adhere strictly to its fiscal deficit objective of 3.5 per cent of the GDP for 2016-17.

Going by newspaper reports JP Morgan appears to be running monetary policy, suggesting that if the government sticks to its fiscal target, a repo rate cut of at least 25 or even 50 points would follow.

The European and Japanese experience has amply demonstrated that even with negative nominal interest rates there is little appetite for lending if banks are laden with impaired debt.

Indian public sector banks, which provide the bulk of long maturity loans, are groaning under the weight of stressed assets.

 

 

Table I provides a sense of what lies at the core of the Union government's fiscal choices.

  It is apparent, even without the benefit of hindsight, that gross primary deficit (revenue deficit less interest payments) should not have been allowed to rise above three per cent of GDP in 2009-10.

It could be argued that the government had no option but to raise expenditure after the sharp slowdown of the global economy post 2008. However, why has government not done more to raise revenues, which in 2014-15 were at about the same level as 34 years ago in 1980-81?

As the Indian government's Budgets are not accrual-based, contingent liabilities are not recognised.

To that extent, the deficit numbers are understated and probably not comparable across time.

 

 

Table II lists amounts spent on three major subsidies in the past 15 years.

It is incumbent on the government to provide food subsidies, which would be more efficiently achieved through cash-based transfers to bank accounts.

The same line of reasoning holds for the petroleum subsidy.

However, eliminating plant-specific fertiliser subsidies and reducing the enormous waste and worse in Railways, Air India and at the Food Corporation of India have to be priorities to provide more fiscal elbow room.