Saturday, July 19, 2014

Budget 2014-15: The Worst Yet to Come?

Surajit Mazumdar


A remarkable feature of the first budget of the Modi government was that the numbers in it (Table 1 for a summary) – of the revenues that are anticipated from different source, the expenditures allocated to different heads and the fiscal deficit which expresses the gap between the aggregates of these - were almost identical to those in the interim budget presented earlier in the year by the UPA government. The one thing about Budget 2014-15 about which there is virtually complete unanimity is that it could very well have been one presented by the former finance minister P. Chidambaram.
While for obvious reasons many have been chary of articulating it very sharply and clearly, even corporate India and the neoliberal bandwagon appear a little surprised and disappointed at this level of continuity between the UPA and the BJP regimes.

Table 1: Selected Budget Estimates for 2014-15 (Central Government)
Item
Rs. Crores
As Percentage of GDP at Market Prices
Interim Budget
Main Budget
Interim Budget
Main Budget
Revenue Receipts
1167131
1189763
9.1
9.2
Tax Revenue (net to centre)
986417
977258
7.7
7.6
Non-Tax Revenue
180714
212505
1.4
1.7
Total Expenditure
1763214
1794892
13.7
13.9
Non-Plan Expenditure
1207892
1219892
9.4
9.5
Plan Expenditure
555322
575000
4.3
4.5
Fiscal Deficit
528631
531177
4.1
4.1

So how did the budget of a new government which was supposed to usher in big changes become such a replica of a budget in which nothing ‘new’ could be introduced by the outgoing government? What this reflects is firstly the continuity of the thrust towards fiscal consolidation and retreat from the post global crisis stimulus unleashed by the UPA II government. The hallmark of this thrust over the last few years has been expenditure compression in the face of sluggish revenues in order to curb the fiscal deficit. This aspect of the continuity, easily explained by the common class character of the new and old dispensations, is naturally not the one which troubles Indian big business and foreign capital. They are instead disappointed at what appears to them as a paradox - a right-wing government with a comfortable parliamentary majority and five years away from facing the electorate being apparently unable to deliver to them a more sumptuous feast than was managed by the UPA during the last few years of its tenure. What they were expecting was the rolling out by Mr. Jaitley of a great spread – of tax concessions, privatization, cuts in public expenditure on heads like subsidies, agriculture, rural development and the social sector and stepping up of infrastructure spending. Many of these are there in the budget but ‘dil mange more’ and much more is the lament of big business and of their neoliberal acolytes. The failure of the Finance Minister to satisfy this constituency more fully is indicative of the fact that the policy of fiscal consolidation under the present economic and political conditions may have reached its limits and there is an extremely sharp contradiction the government faces between delivering the ‘achhe din’ promised to the people during the election campaign and that expected by those who bankrolled that campaign. The question is – how will they deal with this contradiction?

The Continuity

Both the limited scale of changes between the interim budget and the main budget and the nature of those changes are symptomatic of the continuation of the economic philosophy of the UPA government.
The main budget has increased the total expenditure from the figure in the interim budget but by less than two per cent. Even after this increase, the anticipated expenditure to GDP ratio at 13.9 per cent would be amongst the lowest in recent years and for the third successive year it would be less than the level in 2007-08, the year when the central fiscal deficit was at its lowest point (2.5 per cent of GDP). This is expenditure squeeze being pushed to extremes particularly if it is kept in mind that the public expenditure to GDP ratio in India is among the lowest in the world.
On the revenue side, Mr. Jaitley gave direct tax concessions which would result in some tax revenue loss. This has been partially compensated by shifting the tax revenue burden a little more on to indirect taxes – leaving the total tax revenue estimate less than one per cent lower than in the interim budget. The fiscal deficit target of the interim budget has still been retained despite the tax revenue loss and expenditure increase by relying on getting greater non-tax revenue (through higher dividends from RBI, FM auction and increased user charges for social services) and higher proceeds from disinvestment of government equity in companies than were there in the interim budget.
In other words, Mr. Jaitley while tinkering with the interim budget has clearly gone by the neoliberal book – other decisions like hiking the FDI limit in insurance and defence and diluting of the government stake in public sector banks are also in line with that philosophy. He also declared that expenditure ‘management’, ‘rationalization’ of subsidies and further reduction in the deficit is what lies ahead. So what is it that he did not or could not do?
The problem with a policy of fiscal consolidation through expenditure control in a time of economic slowdown is that it tends to be both self-reinforcing and self-limiting in nature. Let alone addressing the fundamental constraints behind the slowdown, compression of expenditure does not even allow infusion of a short-term boost to demand in a sluggish economy. As a result it tends to reinforce the slowdown and its adverse affects on revenue and this is aggravated by a tendency to provide ‘tax relief’ on account of the slowdown. A significant lowering of the tax-GDP ratio after 2007-08 is what India has witnessed. If the fiscal deficit has to be controlled in such circumstances then expenditure must also be reduced which results in the same cycle being repeated. Eventually, however, this approach tends to hit a dead-end for economic as well as political reasons – where the scope for cutting expenditures tends to get exhausted which in turn limits the ability to give tax concessions. It is this dead-end which is referred to as the ‘absence of fiscal space’ which the Modi government is facing precisely because it is continuing with the same policy. If it has to move significantly further down this path, and it will inevitably be driven to that, it has to create the political conditions which will allow it to make a quantum leap in the burdens that are imposed on the people. A parliamentary majority resulting at least in part from the discontent generated by the pursuit of that same objective by the UPA regime is not sufficient for this purpose.

The Expenditure Squeeze: Not Enough?

Those who argue for further expenditure squeeze or diversion of expenditure to capital investment typically point towards subsidies as the one area where big cuts were possible. The contention is that under the UPA the expenditure under this head grew astronomically. However, while it is true that 2008-09 witnessed a one-off hike in the expenditure on subsidies since then there has hardly been any trend of the subsidy bill burgeoning. The initial jump in 2008-09 was primarily on account of fertilizer subsidies. In every year thereafter, the expenditure on fertilizer subsidies has been in absolute nominal terms less than in 2008-09 and Budget 2014-15 continues that trend. As a percentage of GDP in fact, 2014-15 will be the third successive year in which the expenditure on fertilizer subsidy will be lower than in 2007-08, that is before the hike happened. If this did not bring down the subsidy bill, it was because petroleum subsidies rose from 2019-10 till 2012-13. However, in the last year (2013-14) and in Budget 2014-15 these too have been cut and as a percentage of GDP are slated to fall sharply. Food subsidies have maintained a steady share in GDP and what is remarkable in their case is that the enactment of a Food Security Act does not seem to have made any significant difference to the budgeted level of this expenditure. 

Table 2: Central Government Expenditure on Subsidies and Selected Major Subsidies, 2007-08 to 20014-15

Year
In Rs. Crores
As Percentage of GDP at Market Prices
Total Subsidies
Food
Fertillizer
Petroleum
Total Subsidies
Food
Fertillizer
Petroleum
2007-08
70926
31328
32490
2820
1.4
0.6
0.7
0.1
2008-09
129708
43751
76603
2852
2.3
0.8
1.4
0.1
2009-10
141351
58443
61264
14951
2.2
0.9
0.9
0.2
2010-11
173420
63844
62301
38371
2.2
0.8
0.8
0.5
2011-12
217941
72822
70013
68484
2.4
0.8
0.8
0.8
2012-13
257079
85000
65613
96880
2.5
0.8
0.6
1.0
2013-14 (RE)
255516
92000
67971
85480
2.3
0.8
0.6
0.8
2014-15 (BE)
260658
115000
72970
63427
2.0
0.9
0.6
0.5

To put the subsidies picture in its proper perspective there are two additional things which need to be noted:
The first is that these expenditures have taken place in a context in which food and fuel prices – both of which are affected by food, fertilizer and petroleum subsidies – have been at the heart of the high inflation rates the Indian people have suffered over the last seven to eight years. Moreover, with the situation in West Asia and the very real prospects of a drought looming large, 2014-15 is likely to witness a greater build-up of these inflationary pressures (It must also be kept in mind that the taxes earned by the Government from the oil sector far outweigh petroleum subsidies). If anything, then, it is the reluctance to increase expenditures on subsidies rather than profligacy which should be the object of criticism. The idea that that these expenditures, barely 2 per cent of GDP, are ‘too much for the nation to bear’ harks back to the colonial times when India’s British rulers let millions die in famines.
The second and very important point to remember is that fertilizer subsidies are one item of expenditure related to the agricultural sector and the rural economy (food and petroleum subsidies also have a bearing on the sector but somewhat indirectly). If one sees the expenditure trend in it alongside that on agriculture, rural development and irrigation, the results are startling. Even when compared with 2007-08, the increase in nominal expenditure on agriculture and rural development in 2013-14 was much lower than the increase in total expenditure and this holds even if we were to add the fertilizer subsidy to it.  If the comparison is instead made with 2008-09, it becomes a story of contraction! Those who are crying for cuts in fertilizer subsidies are in effect therefore demanding an even bigger squeeze on the rural economy!

Table 3: Percentage Increase in Nominal Values of Revenue, Expenditure and GDP
Item
Revised Estimates 2013-14 over Actuals of 2007-08
Revised Estimates 2013-14 over Actuals of 2008-09
Gross Tax Revenue
95.4
91.5
Centre's Tax Revenue
90.2
88.6
TOTAL EXPENDITURE of Central Government
123.2
79.9
Agriculture+Rural Development+Irrigation (Plan and Non Plan)
76.1
2.3
Agriculture+Rural Development+Irrigation+Fertilizer Subsidy (Plan and Non Plan)
92.3
-5.4
GDP at Current Market Prices
127.7
101.7
          

Prospects

No matter what the neoliberal bandwagon may try to project, the stark reality is that excessive expenditure is not the source of the Government’s fiscal problems. As Table 3 shows, on a point-to-point basis the increase in total expenditure between 2007-08 and 2013-14 was less than that in nominal GDP – agriculture and rural development being the biggest casualty (social services and food subsidies too have been adversely affected). The real problem has been that revenue growth has been even more laggard. In such circumstances, the room for further squeeze on expenditure and for tax concessions must remain limited unless the Government is willing to administer a very very bitter pill to the already suffering common and working people of the country. The compulsion to administer such a pill may arrive very soon.
For one, Mr. Jaitley has retained the somewhat optimistic revenue estimates of the previous Finance Minister.  For the last two years actual revenues have fallen short of estimates which in turn have resulted in expenditures being less than originally budgeted.  The Modi government might be driven to do the same if it wants to stick to the fiscal deficit target.
On the other side, no provisions have been made in the budget to deal with the very real possibilities of increase in oil prices and drought. Even NREGA expenditure in nominal terms has been pegged at the same level as last year which was a relatively good year for agriculture (in real terms this means a contraction) and below the actual expenditure in 2010-11. Unless it is exceptionally lucky, therefore, the Modi government will have to let people suffer extreme distress if it insists on sticking to the expenditure targets laid out in the budget. Even if these immediate possibilities are somehow averted, reducing the fiscal deficit over the next couple of years will still involve a bitter pill. Whether the Government will succeed in these efforts to push fiscal consolidation and please its corporate backers or not remains to be seen. What is clear is that they will not be ultimately deterred unless they are defeated in the struggle that this context inevitably involves – a struggle in which the array of instruments in the Sangh Parivar’s arsenal will be deployed to create ‘conducive’ political conditions!

The author is Professor at the Jawaharlal Nehru University, New Delhi.


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