Already, commentary on the Union Budget has been prolific. I propose to examine it from my concern over fiscal consolidation. The most striking aspect of India’s fiscal stance since 2008-09 has been a slow erosion of the gains made in fiscal consolidation during the preceding four years. Indeed, many emerging economies may have made an error in going along with heterodox fiscal stimulus policies initiated by advanced economies most hit by the 2008-09 global recession. For example, there is scant analysis that India needed a stimulus following its successful conservative fiscal stance of 2005-08 when, by global standards, record-high real tax revenue growth and containment of public debt were achieved (see Table I). Subsequently, reversals from expansionary policies internationally appeared only in 2011-12 after further macroeconomic deterioration in advanced economies, and the concomitant realisation that expansionary policies cannot lead an economy out of deep breaches in economic fundamentals. Thus, the reversal was inevitable, since unfettered expansion failed finally to escape the judgement of global rating agencies.
India did not change its fiscal stance adequately even in 2011-12. Table I shows the deteriorated tax/GDP ratios, hovering around seven per cent since 2009-10. Overall revenue receipts suffered the same experience. Total expenditure/GDP ranged between 15.5 and 16 per cent, though in 2011-12 it was constrained to below 15 per cent. In the toss-up, has there been any consolidation? The significant rise in the fiscal deficit indicates that indeed there was fiscal worsening, and what the 2012-13 Budget has proposed is to reverse direction and attempt fiscal consolidation by almost one per cent of GDP through a massive tax effort.(Click here for tables)
Fiscal consolidation is best examined through the annual changes in tax and expenditure. Positive numbers for both revenue and expenditure indicate desired fiscal tightening while negative numbers reveal fiscal worsening. It is apparent from Table II that, except for 2010-11, the high growth year, the tax side did not help fiscal tightening, though the expenditure side was more successful. Also, non-Plan expenditure was tightened more than Plan expenditure — a welcome feature.
Table III elaborates on expenditure composition. For example, pension expenditure and defence have been on a tightening mode since 2010-11, and subsidies are budgeted to be significantly tightened in 2012-13, yielding an overall supportive outcome for non-Plan expenditure. Plan expenditure, on the other hand, has not, on average, been tightened and is budgeted to expand significantly in 2012-13. On the whole, therefore, within the complexity of a centrifugal coalition government, expenditure tightening and changes in its composition have been relatively successful.
Table IV goes on to decompose subsidies. Interestingly, tightening has occurred, by and large, in fertiliser and food subsidies. This is to continue in 2012-13. On the other hand, petroleum subsidy has increased in recent years and has overwhelmed gains in other areas. It is no surprise that the Budget has proposed its most significant tightening for 2012-13. One can only speculate on its chance of success, however.
The effort made by the central government in tax revenue is the focus of Table V. The overall tax effort is revealing in itself. It may be recalled that last year’s net additional, discretionary tax effort – between direct and indirect tax measures – was some Rs 3,000 crore only as I recall. That is reflected in the negative outcome in gross tax effort for 2011-12. In the light of this recent experience, it is as if the government has suddenly realised its folly and budgeted for discretionary tax measures of Rs 41,000 crore for 2012-13, helping yield an additional 0.5 per cent of GDP tax revenue realisation for 2012-13. What is remarkable is that all of this, and more, comes out of indirect – customs, excise and service – taxes, since there is an actual discretionary loss from direct – income – taxes of Rs 4,500 crore.
While a serious attempt at fiscal consolidation cannot be faulted, the impact of such a massive discretionary tax effort entirely from the indirect tax side on income distribution could be severe, as has been revealed time and again from economic literature*. It does not bode well that the government was able to design consolidation only through worsening income distribution. Of course there are a plethora of incremental income support measures, but they do not benefit the burgeoning lower middle classes who will certainly suffer from the indirect tax measures, and will damage the UPA’s emphatic thrust. It is this type of policy-making that lacks any recognisable analytical framework or strategy that would cost the government precious votes in the near term.
Das ist the fiscal stance of the Budget. It promises a lot and comprises overall good intention; last year there was not even this promise based on a wake-up call. A caveat, however. The fiscal world and cross-country benchmarking will not be swayed by the effective revenue deficit concept as if the cost of creating capital assets by the government should just be ignored. The concept could conceivably provide a check in a tool box, but not anything more. In any event, if the private sector were appropriately encouraged, it would create and manage those assets more adequately and efficiently than bureaucrats and administrators ever could. Perhaps the Budget also deserves a fine-tooth comb examination of its tax and expenditure components — next month perhaps.
*Shome, P. (2011), “Consumption Taxes: Their Ramifications for Income Distribution”, Icrier Policy Series No. 8, New Delhi. http://icrier.org/pdf/Policy_Series_No_8.pdf
The author is director and chief executive, Icrier. These views are exclusively the author’s
