Squeeze on investment

A notable feature of the Budget which has so far attracted little comment is the dramatic reduction in capital spending for which it provides.

The total for next year is Rs 67,832 crore; take away capital spending on defence and the rest amounts to Rs 33,487 crore""which astonishingly enough is less than 1 per cent of GDP.

The contrast with the current year (Rs 86,239 crore, or 2.8 per cent of GDP) is stark but misleading because the numbers are not comparable. The current year's number is exaggerated by a one-off entry that does not recur next year.

The comparable figure for the current year therefore is about 1.8 per cent of GDP. Even from this level, next year's figure shows a sharp dropping off, but further adjustments are probably called for in order to make meaningful comparisons.

A significant level of capital spending has just been moved out of the Budget, and into an investment fund that remains under direct government control""but perhaps outside direct parliamentary scrutiny.

This follows from the deal with the Left parties, under which disinvestment receipts will be earmarked for spending on the public sector and on socially desirable schemes.

Since the Budget provides ample sums for the latter kind of spending, it is to be expected that the bulk of the disinvestment proceeds will be used for capital spending in the public sector.

The figures mentioned in this context by the finance minister are in the range of Rs 5,000 crore to Rs 7,000 crore.

Add to that the Rs 10,000 crore proposed as infrastructure investment through a special purpose vehicle (or SPV), and the capital spending that the government will oversee outside the technical definition of the Budget is about 0.5 per cent of GDP.

Factor that into the calculations and the total non-defence capital spending next year will amount to 1.5 per cent of GDP, down from 1.8 per cent in the current year.

Even after you add defence capital spending, the numbers are far below those in the Fiscal Responsibility and Budget Management Act, which postulates 3 per cent capital account deficit by 2008-09, compared to 1.6 per cent next year (4.3 per cent fiscal deficit less 2.7 per cent revenue deficit) if you accept the government's form of accounting, and 2.1 per cent if you make the above adjustments.

One question to be addressed in this context is whether it is a good idea to keep such a large proportion of the total public sector investment out of the Budget. For one thing, they distort the calculations of the deficit and suggest improvement when there is none.

For another, they remove direct parliamentary scrutiny and voting. This may be seen as a technical loss, since Parliament has rarely, if ever, said no to any money bill that the government puts before it.

It may even be argued that financing investment through a fund or SPV allows for operational checks that are absent once Parliament votes on an expense item, and that this may therefore be a superior way of dispensing money.

But the purist would argue that the parliamentary system demands a core set of disciplines, and these two decisions for next year's Budget do tend to side-step that obligation.