 "Interim Budget 2014: Editors' Take")
A K Bhattacharya: Good afternoon, Mr Ninan! The stock market has remained lukewarm to the finance minister's Interim Budget in spite of his announcing a slew of indirect tax cuts for the capital goods and automobile sectors and his staying well within the fiscal deficit number he had projected. Do they have doubts about these numbers?
T N Ninan: I would not by the stock market's response at this stage, when all that the Budget contains has not been fully understood. The critical fact is that the fiscal deficit has been contained, and the reduction is slated to continue next year, though admittedly on the back of some ambitious tax revenue numbers
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T N Ninan: What Mr Chidambaram has shown is that it is possible to be fiscally responsible in a pre-election year; his tax reductions have been mainly addressed at the sectors facing a demand constraint and can be defended on that account, though he has moved away from the unified rate that a GST would bring in. Short-term practicality, sacrifice of long-term strategy!
T N Ninan: The interesting thing about the numbers is that the government seems to have moved half a step towards giving the state govts greater flexibility in deciding how they want to spend on social sector programmes like health and education. I am told by the Planning Commission that to some extent the transfer of funds for these programmes from the central plan to state plans is an accounting change, but there is a real change underlying that, in terms of giving the states more of a say in how the money is spent. It is interesting that this has been done when the government is likely to be replaced by perhaps a BJP-led government; it is practising devolution before the BJP comes in!
A K Bhattacharya: True, but his expenditure containment plan rides on a 17 per cent cut in capital outlays this year and buoyant revenues next years - 19 per cent tax revenue increase is projected. Also, there is no clear indication of how the subsidies have been controlled - whether by rolling them over to the next year or by actual cuts.
T N Ninan: I agree. The big question is whether the revenue growth budgeted for next year will happen. It is a bigger increase than has been achieved in any of the last 5 or 6 years, so there are obviously some questions. On the other hand, Mr C has also shown that it is not difficult to cut expenditure; so the next finance minister can do that if revenue falls short. The key point is to demonstrate a commitment to containing the deficit.
T N Ninan: A lot of what Mr Chidambaram said in his budget speech had to do with the government's 10-year record, which is actually quite good, though it should be broken up into the good years (the first 7) and the bad years (the last 3). Most people today focus on the last 3, whereas Mr C has tried to emphasise the first 7.
A K Bhattacharya: The states getting more money explained by the restructured centrally sponsored schemes under which the states will have greater flexibility to spend money. In other words the new government that takes charge next year would have less to do with regard to deciding on how to spend that money. A politically smart move?
T N Ninan: To continue on the thought about the UPA record, the fact is that the deficit in its last year is more than the deficit in the last year of the previous NDA government. and that is without taking account of subsidies that have not been accounted for and are being rolled over. Inflation has been higher than during NDA rule, the current account deficit has replaced what used to be a surplus. So this govt is handing the system over in worse shape than it got it.
A K Bhattacharya: One area of concern is the UPA government's consistent failure on meeting its disinvestment targets. This year too it seems the target will not be met almost by half. The spectrum proceeds has bailed the govt out on the non-tax revenue front, but on capital receipts, disinvestment has let the govt down for another year.
T N Ninan: On the smartness of the move to move money from central plan to state plans, we have to see how it actually works. I think the centre's role is reduced but not to zero. How the interplay of forces works in the new arrangement has to be seen. Mr Modi, for instance, would probably want to reduce the centre's role and allow the states to do more.
T N Ninan: I found it odd that the finance minister kept harping on all the good work that the public sector banks have done, without admitting in his speech that these banks are in a mess because of bad loans, and need fresh capital that is very much more than the Rs 11,200 crore that he has provided. They probably need five times as much. That is not a record to be proud of.
A K Bhattacharya: There are also some apparently disturbing numbers on the sharp drop in central plan outlays provided for ministries like health, family welfare, human resources development and rural development. These represent huge cuts. We still do not know what such cuts should take place. Are these for the restructured Centrally Sponsored Scheme or whether the Centre simply has transferred more money to the states to take care of such programmes.
T N Ninan: The question that the expenditure cuts raise is: does the govt really have to spend so much money? If it can get by with spending less, without anyone being noticeably worse off, surely the different ministries can be asked to weed out unproductive schemes and focus their spending on the well-run programmes. Then we would have a permanent correction in the deficit, which (centre and states together) is one of the largest in the world.
T N Ninan: I think the cuts for next year reflect the transfer of plan funds to the states. The cuts this year were mostly on the principle that no one would be allowed to spend more than a third of their budget in the final quarter. So it was more a reflection of the ministries' failure to get their spending programmes going, which the finance minister capitalised on.
A K Bhattacharya: Another area of concern could be the reliance the finance ministry placed on revenue buoyancy next year. With nominal growth expectation of 13.4 per cent next year, the interim Budget hopes to collect 27 per cent more individual income-tax, 15 per cent more corporation tax, 12 per cent more excise, 15 per cent more customs and believe it or not 30 per cent more service tax. In contrast, in the current year, the finance minister failed to meet any of his tax revenue targets that he had projected at the start of the year. That shows how tricky the revenue numbers for the next year could be, unless growth sees a sharp pick up in the coming months.
T N Ninan: I think we should question the finance minister on his assertion that in a developing economy high growth will be accompanied by a moderate level of inflation. First, what we saw in the last 5 years was not moderate; it was perhaps the most inflationary period inn our history. Second, China has achieved very much faster growth, with low inflation. So did many other countries.
T N Ninan: Agree with you on the tax revenue targets; they are not realistic, when nominal GDP growth is expected to be 13.4% (ie real growth plus inflation). Total tax collection is slated to go up by 19%, despite the tax cuts announced. This can happen only if there is terrific economic revival, which is not on the cards. The implicit assumption must be that expenditure will be cut once again.
A K Bhattacharya: It is interesting to look at the sectors where there is no cut in central Plan outlay or indeed the proposed expenditure for next year has been raised. These are the department of higher education, petroleum and natural gas ministry, ministry of power, ministry of road transport and highways and ministry of urban development. The ones that have seen a cut are even more interesting: ministries for drinking water and sanitation, health and family welfare, department of school education and rural development
A K Bhattacharya: Agree that the finance minister has underestimated the adverse impact consistently high inflation has on the economy and indeed the ordinary people. It is strange that he made such a statement a few months before the elections.
T N Ninan: Unless I missed it, the finance minister did not announce a tariff cut on gold imports. This is a great pity, because it has led to gold smuggling being revived. The reason for the jacked up tariff was that the current account deficit was running out of control. That is no longer the case. So why not cut the gold import tariff?
T N Ninan: Yes, the pattern of cuts shows that the finance minister is keen to protect the hard infrastructure sector outlays, and perhaps sacrifice to some extent the social infrastructure areas like health and education. I'm not sure this is the political message that the UPA would want to give.
T N Ninan: We should also look at whether the target of reaching 3% fiscal deficit by 2016-17 is realistic. I think not. If the figure is 4.1% for 2014-15, and we continue the present rate of correction, we will need an extra year or two; indeed, four or more years if we also have to wipe out the off-budget liabilities on subsidy payments--as we should in order to get a real 3%, and not accounting fiction.
A K Bhattacharya: The cut on expenditure this year has not spared even the defence sector - where the capital side of the defence budget has seen a 10 per cent cut. The provision for next year has been raised, but then this is only an estimate and only would only know next what other compulsions come in the way of raising defence expenditure, which has practically seen no improvement in the last decade when compared as percentage of GDP
T N Ninan: On inflation, my view is that we have been looking at only one side of the equation. While it is true that prices have gone ups harply, especially prices of essentials like food and fuel, it is also true that wages have gone up sharply in the same period. Rural wages have been climbing by 15% and more every year, which is more than the rate of inflation. In general, despite the inflation, most people would be better off today than they were 5 years ago. It is a message that the UPA has failed to get across, for whatever reason.
T N Ninan: You are right, that defence preparedness is not what it should be, and the capital budget for defence should have been spared. We have not ordered the Rafale because there is no budget for it. We need to do a great deal more to be sure of our defence in the event of a conflict; indeed, you need to do that spending in order to prevent conflict because the you dissuade the other party. If you are vulnerable, you are more liable to be subjected to some kind of offensive, even if low-grade. We need to do more on defence.
A K Bhattacharya: At the micro level, the impact of the sharp cut in excise duty on SUVs will be interesting to watch. A few years ago, these duties were raised ostensibly because they were seen as a symbol of luxury, which also benefitted from subsidised diesel. What reason could have been there now to bring the duty down?
T N Ninan: Agree, the SUV step is indefensible
T N Ninan: Perhaps we should wind up, the FM is holding a press conference.
A K Bhattacharya: Yes, let us do that. Thanks for being with us Mr Ninan.