The Union Budget of 2011 should have made me very happy. I got promoted to the rank of senior citizen, and have been told that I deserve special attention. I got a substantial hike in my income tax exemption limit as a result of my promotion, and I now have an incentive to live until eighty and become very senior, with an even higher exemption limit.
But there are problems with the numbers. The Medium Term Fiscal Plan (MTFP) projects a nominal GDP growth at 14 per cent in 2011-12. Real growth is expected at 9 per cent, with a narrow error margin on either side of 0.25 per cent. The narrow band suggests an underlying modeling exercise, which however is not disclosed. But with real growth at 9 per cent, a 14 per cent nominal growth rate implies inflation projected at 4.6 per cent. We are just staggering out of a year in which, by the latest CSO estimates, nominal GDP growth was 20.3 per cent, and real growth at 8.6 per cent, giving us inflation by the GDP deflator at 10.75 per cent. So, inflation is expected to be more than halved next year. At a time of rising global food prices, turbulence in West Asia and climbing oil prices, that appears too optimistic an expectation.
If higher inflation raises the nominal growth rate above 14 per cent, a more than likely possibility, a 4.6 per cent fiscal deficit could be achieved with a much higher absolute net borrowing, as happened in 2010-11. The absolute fiscal deficit was higher than budgeted by Rs 19.6 thousand crore, and still a lower percent of GDP at 5.1 than the 5.5 percent projected.
The two big ticket subsidies, food and fertiliser, are pegged in the budget estimates for next year at just a touch below the revised 2010-11 estimates for food, and at Rs 5,000 crore below for fertiliser. Clearly the new Food Security Bill has not been factored in, not even in terms of the range of options in terms of its perimeters. That makes the Budget very incomplete, unless it has been decided that the bill becomes operative only in 2012-13. As for the fertiliser subsidy, the revised figure for the concluding year was Rs 5,000 crore higher than budgeted, so the figure for the forthcoming year pegs it at what was budgeted the previous year. The move to a nutrient-based subsidy scheme last year did not contain expenditure at budgeted levels, so why is last year’s Budget expectation being retained? Then again, the nutrient-based subsidy rates are not known. A rolling MTFP with a clear policy path would have related the subsidy rate reductions to the subsidy bill, in a way that an annual exercise with ad hoc numbers does not.
In order not to spook the markets with these obfuscations, and with the clear room next year for higher net borrowing while still retaining fiscal correction in percentage terms, the budget speech for the very first time, or certainly the first in my memory, announced that net market borrowing will be at Rs 3.43 lakh crore, well below the absolute fiscal deficit of Rs 4.13 lakh crore. From the small print, it would appear that the difference of Rs 70 thousand crore will be financed by a drawdown of cash balances. Those cash balances were presumably sequestered from the fiscal accounts of 2010-11. Had that not been done, the fiscal deficit in 2010-11 would have been lower in absolutes than budgeted and still lower as a percentage. But it would have made the fiscal correction in 2011-12 look less muscular. The speech adds further comfort for the market by mentioning that Rs 15 thousand crore will be financed through short-term treasury bills.
Window dressing of this kind happens when fiscal discipline is reduced to a matter of targets. Fiscal discipline is fundamentally about transparency and disclosure. What really spooks markets is concealment and prevarication. The fiscal responsibility legislation that was to have been enacted in 2010-11 as a successor to the previous act of 2003, is promised as a follow-on to the budget in the form of an amendment to the earlier act. The amendment must radically alter the MTFP, which is presently chatty but not very informative, to a serious rolling projection of expenditure commitments going three years into the future. Alternative scenarios have to be presented for a variety of values of basic parameters such as the price of oil and the rate of interest underpinning the projections, and for a range of bills on the anvil with expenditure implications.
Centrally sponsored schemes such as the Sarva Shiksha Abhiyan, and the forthcoming Madhyamik Abhiyan, require co-funding from the states in steadily rising proportions. States need to know in advance about these claims that will be made upon them. The inclusive social outcomes the central government rightly wishes, and the enhanced agricultural productivity that is desperately needed to hold down food inflation, can only be achieved in partnership with states. Unalterable commitments in respect not merely of statutory flows, but of the non-statutory flows they receive under a huge range of Budget heads, will give state governments firm fiscal parameters within which they can plan ahead. No less than the GST, progress on these fronts can only be made “in concert” with states, to use a turn of phrase from the finance minister’s speech.
One projection alone seems not merely plausible, but actually cautious. Gross tax revenue is projected to increase only by 18.5 per cent. With nominal growth at 14 per cent, that is an assumed buoyancy of 1.3. Why did the speech blot this caution with a reference to a 25 per cent gross tax revenue increase from budget estimate to budget estimate?
The author is Honourary Visiting Professor, ISI Delhi