T N Ninan: AKB, hi. Have you had a chance to go through the Budget papers?
A K Bhattacharya: Well, Mr Ninan, to start with, Finance Minister Chidambaram's Budget seems to be a delicate balancing act as he has both responded to the political requirements of a pre-election-year Budget and the economic compulsions of fiscal consolidation and investment revival. What do you think?
T N Ninan: Well, we should look at what his Budget speech did NOT say. If you try to understand the management of the fiscal deficit, which was a central task for Mr Chidambaram, he has maassively squeezed expenditure this year to keep the deficit wthin 5.2% of GDP. He has slashed everything, from plan spending to defence spending. Without such firm steps, the deficit would have crossed 6%.
T N Ninan: The point of course is that you can't do that twice in a row. So for next year he has allowed a 16% increase in total expenditure, compared to this year's 10 % or less.
T N Ninan: If we then try to understand how he hopes to reduce the deficit further next year, to 4.8% of GDP, the secret lies in ambitious revenue targets. These may or may not be met. So don't be surprised if the deficit eventually ends up somewhat higher than projected. For the moment, though, the important thing is that the finance minister has restored credibility and discipline to the fiscal process.
T N Ninan: In terms of targeting in a pre-election year, he has done the obvious thing: give a little to the lower income groups, take some from the higher income groups. You can't object to this, because the higher income groups have got the major benefits of the rapid growth of the past decade. So if you have to pay a little more for a cell phone or an expensive car, or a flat that costs more than a crore, it's not a huge imposition on essentially well-off people.
A K Bhattacharya: Yes, I agree. His expenditure compression is largely based on a cut in Plan spending. If you look at the revenue account of his non-Plan expenditure, which largely constiutes subsidies and wages etc., that is where the largest increae has come and for next year, this head seen a sharp increase again. So, there is no real expenditure squeeze happening. And he has relied on revenues to help him show a 4.8 per cent fiscal deficit next year. In short, his Budget speech and the numbers raise many que
T N Ninan: The key economic objective, other than inflation control, is to revive economic growth. And to the extent that the problem has been lower savings as well as diversion from financial savings to gold and property, there are some steps in the budget to make financial savings more attractive. On the flip side, which is investment by companies, he has offered an investment allowance in an effort to make them speed up investment. So he has tried to address the key economic problem by addressing saving
A K Bhattacharya: And if you see his subsidies expenditure for next year, it is estimated at Rs 2.31 lakh crore, which is over two per cent of his own GDP estimates. On a budget estimate to budget estimate basis, the government's subsidies spend has gone up by 21 per cent. If this year's subsidies could not be reined in, what hope has he given to contain subsidies next year?
T N Ninan: The other macro problem has been that bank deposits have been growing too slowly. Mutual funds in the debt market have had a tax advantage, so many people have moved their money from banks to debt mutual funds. If I understand it correctly, the Budget addresses this by raising the dividend distribution tax for debt mutual funds. That might help move more money into banks, which would then go to finance more credit at lower interest rates.
T N Ninan: You are right that he has not been able to cut revenue expenditure, but that is not easy. It is easier to squeeze capital spending, which is what he has done. On subsidies, the politics of the year gave him little chance to do anything. It also remains to be seen how much of what is budgeted for next year is actually to pay this year's bills.
A K Bhattacharya: But what about basic reforms like allowing the postal department to recover its costs at least. Take a look at the government's postal deficit at Rs 6,717 crore for next year, which goes up by 17 per cent or so. Why can't simple reforms like raising the government's non-tax revenues be raised? Indeed, the govt's non-tax revenue has moved up only marginally.
T N Ninan: The problem with subsidies cannot be addressed without addressing agricultural policy. The total cereal economy is barely 4% or 5% of GDP. But the food and fertiliser subsidies now account for about 1.5% of GDP. On top of that there are farm subsidies on electricity and water. So your cereal economy is out of whack, while there are no subsidies or benefits for the rest of the agricultural economy, which is in fact growing much faster. We have to give a fresh look to the entire set of agricultura
T N Ninan: I don't think the postal dept can be viable in its present form. It is easier to make a phone call, and local courier charges compete with posts. You have to get the postal dept to offer more services and earn revenue in new ways. If I understand what Mr Chidambaram said in his speech, that is what they are trying to do; he talked of getting post offices to offer real-time banking and to make them part of core banking. That would be a major step.
T N Ninan: My quarrel is with the Rs 25,000 crore that is going to be spent over two years on shoring up the capital base of state-owned banks. Why should the taxpayer pay for this when the banks can get money from the capital market? This is less defensible that any of the subsidies.
A K Bhattacharya: That will require a mindset change in which the government is comfortable with reducing its equity in public sector banks below 51 per cent, as some of the banks at least right now are at that threshold. On the contrary, there is a proposal in this budget to have another public sector bank - meant for women only!
T N Ninan: Keeping my focus on the broad picture rather than on the nitty-gritty, I would say that the most important task for the FM was to kep credibility by showing control of the fiscal deficit. That he has done, and thereby he has continued the good work that began with his becoming the FM in August. That is what has prevented India from being downgraded by the international rating agencies; a downgrade to junk status would have affected capital inflows and made it difficult to finance the record trad
T N Ninan: A women's bank is a kind of obvious ploy to get some claps in the House. Financially, it has no meaning because anything it offers to women customers a general bank can and will offer. This is being gimmicky.
A K Bhattacharya: An area of concern to me is that taken as a percentage of the government's total expenditure,the spend on subsidies would go up to 11 per cent from the current year (10 per cent) and the spend on defence would come down to 10 per cent from 11 per cent in 2011-12.
A K Bhattacharya: yes, that is true, but the proof of the pudding is in the eating. Only the numbers next year would tell us if his revenue estimates were an exaggeration.
T N Ninan: I think the defence squeeze is unfortunate. Our security environment is getting more difficult, and the challenges are greater. China is massively outspending us. And the real hit will be on acquiring new weapons, which is exactly what we should avoid doing. The total defence spending now is less than 2% of GDP, which is what you see in European economies that face no security threat. I would say the defence budget should have been increased, and increased substantially on the capital side for g
A K Bhattacharya: On that note, Mr Ninan, can we close this chat session?
T N Ninan: On GDP growth of about 6.5 per cent as an optimistic assumption, and inflation of about 12 per cent, the assumption of 19 per cent growth in tax revenue is certainly optimistic. That's the danger in the numbers.
T N Ninan: Yes, I've said what I want to on the macro picture. Thanks and bye.
A K Bhattacharya: Bye, Mr Ninan. Thanks foir agreeing to take part in the chat session.
