Huge government spending plan sends jitters down the line
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Optimists are hoping that the Finance Minister has something really up his sleeves
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— PHOTO: AP
FOCUS ON INFRASTRUCTURE: A new bridge under construction in the Jammu-Pathankot highway. Infrastructure spending is estimated at 9 per cent of gross domestic product by 2014.
A spending-led path to growth pursued by the Union Finance Minister Pranab Mukherjee in Budget 2009-10 has set off nervousness across the spectrum. This sense of anxiety has not taken a more visible format at the moment for understandable reasons. After all, Mr. Mukherjee has kept the window of hope open when he said that a single budget speech could not solve all problems. “Nor is the budget the only option to do so,” he went on to add. Optimists are hoping th
at the Finance Minister has something really up his sleeves to unveil soon. A spending binge, it is argued, will put more money into the hands of the people, which, in turn, will have a cascading effect and spur demand.
Any student of Economics will understand the logic behind this argument. A spending programme in excess of Rs. 10 lakh crore for 2009-10, up from the 2008-09 budget estimate of Rs. 7.51 lakh crore, is sought to be justified in an economic slowdown situation.
Laying greater emphasis on the politically rewarding ‘inclusive growth’ formula of the UPA (United Progressive Alliance) Government, the Budget 2009-10 justifiably hiked the outlay for its flagship National Rural Employment Guarantee Scheme (NREGS) and assorted other pet programmes. As part of its ‘inclusive growth’ agenda, the budget has gone on to please even the income-tax paying community, which is, more often than not, given a short-shrift by successive finance ministers. The tax sops for individuals will ultimately work out to nothing if one takes into account the extra pinch in their pockets caused by the impact of the increase in prices of petrol and diesel announced just prior to the presentation of the budget. Their worry is confounded by the uncertainty over the slowdown conditions in the economy. The removal of fringe benefit tax (FBT) may have pleased Corporate India but the shifting of tax onus on employees has come at an inappropriate time.
The emphasis on spending in the current slowdown may, no doubt, find many takers. But the question is: How does the government find resources to spend such huge money? The catch, nay the worry, lies here. The critical numbers have gone for a toss. No doubt these are extraordinary times. Hence, one may argue, extraordinary deviations are justified from the fiscal responsibility path to purse the growth road. The deficit numbers have sent jitters down the line. The fiscal deficit is projected at a little over Rs. 4 lakh crore or 6.8 per cent of the GDP (gross domestic product), up from the 2008-09 budget estimate of Rs. 1.33 lakh crore or 2.5 per cent of the GDP. Scarier still is the level of revenue deficit projected for 2009-10. The budget has projected the revenue deficit to grow from Rs. 55,184 crore or one per cent of the GDP in 2008-09 budget estimate to Rs. 2.83 lakh crore or 4.8 per cent of the GDP in 2009-10.
What is a revenue budget? It comprises the revenue receipts of the Government (tax revenues and other revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the Union. Other receipts mainly consist of interest and dividend on investments made by the Government, fees and other receipts for services rendered by Government. What is revenue expenditure? It is the money spent for the normal running of Government departments and various services, interest payments on debt and subsidies. To put it simply, any expenditure which does not result in the creation of assets for the government is treated as revenue expenditure. Given this definition, the revenue deficit number projected in the 2009-10 budget is a huge cause for concern.
The budget is sought to take recourse to market borrowing route to fund the deficit. Gross market borrowing in Budget 2009-10 is placed at Rs. 4.52 lakh crore. It is clear that a substantial part of the projected borrowing will go mainly to fund the revenue deficit (Rs. 2.83 lakh crore). To put it simply, much of the borrowing would go to fund the normal running of the Government! It is akin to one borrowing to eat.
The current nervousness across the industry spectrum is the result of these two critical deficit numbers. Post-budget, the Finance Minister has moved quickly to quell the apprehension.
Even as the recession is engulfing the global economies, the Indian economy has indeed slowed down. In his speech, the Finance Minister said that the GDP growth rate had dipped to 6.7 per cent in 2008-09 after hovering around an average nine per cent in the previous three years. He admitted that the growth slowdown had indeed affected job creation and investments in certain sectors. The concern over the fiscal numbers must be read in this context.
Notwithstanding assurances, there is lurking fears that the massive borrowing programme of the Government will have adverse impact on interest rates. If these fears come true and interest rates indeed move up, it will have a series of adverse reactions across the chain. Theory tells us that the high interest rate-induced trigger effect could put the economy on a downhill course.
The Finance Minister himself admitted that the huge deficit numbers aren’t good even for the near-term, let alone for the medium period. In fact, he had even indicated a roadmap to bring the critical fiscal numbers down. On the face of it and by his own admission, Mr. Mukherjee has taken a huge risk in preferring to move the spending path to growth. By stating candidly in the beginning of his speech that the budget was not the only tool to solve all the problems, he appears to be simultaneously working on `outside-the-budget’ initiative – may be policy-led measures – to stem the slide and put the economy back on higher growth track.
One thing, however, is very clear. Since the liberalisation era started in the 90’s, no Finance Minister had taken such a calculated risk. Perhaps none was in such an unenviable position as Mr. Mukherjee the Finance Minister is in today.
K. T. JAGANNATHAN
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