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Medium term challenges Will bond purchases aid rupee stability? No solution for FX travails India can become the food bowl of the world Economic indicators that will drive 2013 It bats for “quantitatively measurable” regulators Wanted: specialised housing finance regulator A tactical and strategic blunder Budget for institutional and policy integrity Gold plunge won’t cure India’s CAD travail
 
Budget for institutional and policy integrity
India’s economic discourse should go beyond the hype surrounding calendar events such as the annual budget or the RBI’s monetary policy announcements. A lot of critical economic policy making, impacting the lives of millions of ordinary citizens, takes place outside the budget. Integrity and account
One has to note that despite large deficits in recent years – particularly after FY 2008-09 – India’s accumulated deficits (broadly equal to the public debt) have declined as a fraction of the GDP – from 84 per cent in 2003 to only 67 per cent in 2011/12. 
INDIA'S ECONOMICS policy makers – particularly monetary policy makers – too have succumbed to the temptations of instant gratification. They have too easily believed in the capabilities of their policy moves to produce – if not real-time changes in the macro-economy – at least changes every month to match the periodicity of economic data releases. A perspective approach and recognition of how policy moves impact the economic living conditions of the common man over a period of time have been conspicuously missing in this “instant gratification environment.”

Something very similar applies to the annual spectacle called India’s budget. So much hype, secrecy and hyperbole surround the budget, which is considered as just that single panacea for all the nation’s economic woes.

In public administration, a concept called as “delegated legislation” empowers public authorities to fill in the details and specifics and the implementation procedures of a broad law, which may have been passed by the legislature. While a necessary feature of administration, all care should be taken to ensure that the powers of delegated legislation are not willfully misused or ignorantly abused, but are used for only the public good.

A somewhat analogous situation prevails in our economic policy-making – be it budgeting, fiscal policy making, monetary policy making et al. Vast powers have been conferred on public authorities such as Finance Ministry and the Reserve Bank of India. The only and key question, which no one seems to be asking, is: are they exercising those powers properly and for the public good?

Not really, if India’s macro-economic experience over the past couple of decades is any indication. By macro-economic experience, we mean whether the day-to-day lives of millions of ordinary citizens have gotten any better in the past 20 years. If that is the test, our policy-makers do not make the grade as is evident in the rampant inflation across a range of everyday goods and services which ordinary people consume.

Budget exercise and anomalies

The annual budget exercise and the anomalies flowing from that exercise and post the budget are a good case in point exemplifying the above situation.

As is well known, the latest budget was presented in a very challenging macro-economic situation, brought on both by domestic and global conditions, though policy makers would prefer to blame only the latter. In this environment, it seems a commendable job for the Government to have stuck to some very public commitments made, in the past few months, regarding the level of the budget deficit.

The containment of the deficit for FY 2013 at 5.2 per cent (against the projected 5.1 per cent) and the resolve to limit it further to 4.8 per cent for FY 2014 has been noteworthy.

But, wait. Does anyone pause to look deeper into these headline numbers?

To be sure, adhering to some headline commitment is to be welcomed but what has been the quality of the adherence?

There has been a significant curtailment of planned expenditures in FY 2013 to attain the projected deficit number of 5.1 per cent - planned expenditures have been cut by nearly 20 per cent from that budgeted for FY 2013. The axe on planned expenditures is what seems to indicate that the quality of the fiscal adjustment is quite weak. Planned expenditures in India’s budget broadly include discretionary expenditures which can increase the productive capacity of the economy– for instance, public infrastructure spending, capital expenditure programmes of public sector units such as CIL or even capital expenditure in the agriculture sector such as strengthening irrigation facilities / dry land farming, etc.

If expenditure curtailment is to be focused only on planned expenditures, this can have an adverse impact on long-term capital asset creation in the economy.

Non-plan expenditure on the other hand has not been reduced at all – in fact, has even increased by 5 per cent on the revenue account and is slated for a further 10 per cent overall increase in FY 2014. Non-plan expenditure primarily comprises subsidies – food, fertilizer and petroleum – and other transfer payments, salaries, pensions, etc.

The 10 per cent increase in non-plan expenditure projected for FY 2014 appears optimistic and quite on the lower side if the track record on this front is any indication. The 3 critical areas of food, fertilizer and petroleum subsidies have not seen any determined attempts at long-term reduction.

One does not know what the final bill on food subsidies will be given the likely introduction of national food security in the coming year – nor on petroleum subsidies despite the recent decisions on incremental increases in diesel prices, curtailment of LPG subsidies and that on petrol.

One has to also note that global commodities prices have not seen any dramatic reductions. The petroleum product group is, in fact, holding quite steady.

No cut in non-plan expenditure is what creates the doubt as to whether the Indian government is on a sustainable path to medium-term deficit cutting. Or is the talk on deficit containment just that – talk?

To be sure, in a weak economy, expenditure curtailment was possibly the only immediate strategy available for meeting the deficit targets. Having taken care of the immediate pressing needs, the government seems to have had some “leeway” in projecting its revenue and expenditure estimates for FY 2014.

This has enabled the projection of a lower 4.8 per cent deficit number for the coming fiscal.

If FY 2013’s experience in severely curbing expenditure to be in line with the budgeted deficit numbers is any indication, the credibility attaching to the 4.8 per cent number for FY 2014 is not small.

But, here is the caveat. The government also will obtain significant help if inflation broadly remains in the 8 to 10 per cent range – this will provide both a larger revenue base for the application of the unchanged tax rates as well as help in keeping the deficit ratios under check.

Indeed, one has to note that despite large deficits in recent years – particularly after FY 2008-09 – India’s accumulated deficits (broadly equal to the public debt) have declined as a fraction of the GDP – from 84 per cent in 2003 to only 67 per cent in 2011-12.

The key to that decline in the debt / GDP ratio is the high level of inflation – in working out the deficit / GDP ratio, the high inflation substantially enhances the denominator (the GDP number) with the result that the ratio comes out smaller.

Now, this is something, which should be the focus of all attention, and analysis post the budget. Note that, in an arithmetical sense, when the deficit is some 6 or 7 per cent, it will not be difficult to project a decline in the ratio based purely on higher inflation, which will enhance the size of the denominator (GDP). It will not be that easy to spot and the government can get away with such number crunching. But, when the deficit is say 1 or 2 per cent, any such jugglery can be easily spotted since jugglery when the deficit ratio is already low can lead to somewhat impractical outcomes – for instance, a surplus on the budget when the government is actually borrowing in the markets.  

On the business investment side, the proposal for a 15 per cent investment allowance on plant and machinery investments above Rs.100 crore over and above the existing depreciation benefits apparently is interesting and welcome.

But, will it be a trigger or a sufficient condition for investments activity to pick up?

Note that an investment allowance makes sense for the investor (entrepreneur) only when he is reasonably certain about making profits from an investment decision he is contemplating. The allowance will then enable him to conserve the profits he is making which can be ploughed back into his business to make it more profitable. The allowance, in that sense, is a kind of icing on the cake and can potentially catalyse further investments. But the basic foundation or the necessary condition for investments to pick up is the expectation of good profits. That does not seem to be present in the current investment environment.
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