Predicated on recovery

Back in 2011-12, before P Chidambaram returned as the finance minister, the fiscal deficit was Rs 5.16 lakh crore. In the Budget that Mr Chidambaram has presented to the Lok Sabha, the deficit for next year has been put only marginally higher, at Rs 5.29 lakh crore. In a three-year period (2012-15) during which average economic growth is almost certain to be the lowest in any three-year period since the early 1990s, the government's revenue has been budgeted to grow by 55.3 per cent, and expenditure by 33.7 per cent; the absolute figure for the deficit has thereby been kept virtually unchanged - and brought down from 5.7 to 4.1 per cent in relation to gross domestic product (GDP). This would be a considerable achievement, and points to the fiscal correction that Mr Chidambaram has achieved and postulated.
 

Admittedly, though, the arithmetic is predicated on some ambitious assessments of tax revenue growth (19 per cent for next year, something that has not been achieved in any recent year when there were tax cuts). The underlying assumption about GDP growth (about six per cent) is also mildly optimistic. Finally, since substantial subsidy payments are not accounted for because payouts have been deliberately delayed, the roll-over of the unpaid sums could be anything up to a percentage point of GDP. These take some of the sheen off the fiscal correction achieved or claimed. It must also be recognised that the government has had to take the equivalent of a meat cleaver to budgeted spending - carving Rs 75,000 crore (about 0.66 per cent of GDP) out of what had been provided for this year in order to neutralise massive shortfalls in tax collection and disinvestment proceeds. If little or nothing has been lost on account of the expenditure cuts, it says something about the quality and value of much of government spending - providing fresh fuel to the critics of the proliferating boondoggles. The danger is that expenditure that has been compressed hard by a determined finance minister could balloon right back if there is no discipline.

Since Mr Chidambaram spent much of his Budget speech outlining the many ways in which things have improved (and assuredly so) since the first Manmohan Singh government took office 10 years ago, it is also worth looking at the broad macroeconomic numbers from that same decadal perspective. The government was handed over an economy in which the fiscal deficit was 4.4 per cent, without fudging through off-Budget roll-overs; today it is 4.6 per cent plus off-balance sheet items. It got an economy that had a current account surplus, compared to the 2.5 per cent deficit postulated for this year. The slippage is substantially explained by the sharp increase in crude oil prices in the interregnum (from $38 per barrel in 2004 to $108 now), so the government should not be given any negative points on this score - other than to point out that demand could have been compressed if petroleum subsidies had not been allowed to balloon. Kerosene prices, for instance, have seen precious little change over the decade, while the reform of price supply and pricing has been torpedoed by none other than Rahul Gandhi. Finally, there is inflation on which this government has a particularly poor record, whereas consumer price inflation in 2003-04 was just 3.8 per cent. Annual average inflation of 10 per cent during the second Singh term cannot be fully explained by either oil prices or the increase in foodgrain procurement prices (issue prices have remained unchanged since 2002). In short, despite Mr Chidambaram's achievements since returning to the finance ministry, this government's record on macroeconomic management has left much to be desired.

Going beyond the broad numbers, the most important aspect of the Budget is the excise cuts for the automobile sector, capital goods and some other areas. These can be defended quite easily as being necessary to boost growth in sectors where demand is depressed, and price cuts might help the process. However, it needs bearing in mind that each time the finance minister makes such ad hoc cuts, he moves away from the uniform tax rate that is at the heart of the proposed goods and services tax; the transition to a sensible GST has, therefore, become more difficult with this Budget. And specifically with regard to the excise cut for what are called sports utility vehicles (or SUVs) that are really mini-trucks in disguise, there can be no defence given how fuel-inefficient these monsters on the road are.

As for governance structures, the most significant change is how the government has transferred over Rs 2 lakh crore from the Central Plan to State Plans. Large programmes for school education, health care, women and child development and rural development have been transferred virtually wholesale from the Centre to the states. This is more than an accounting change, although the money will continue to be given to the states by the Centre. The states will now have greater volition when it comes to flexibility and even programme structuring. In terms of devolution of spending powers, this is the most radical move in many years and is entirely to be welcomed. The Centre will continue to stipulate guidelines for how the money is to be spent, but the states will have a say in framing those guidelines - and for tailoring them to the needs of individual states instead of asking everyone to fit into the same straitjacket. How one wishes that the bloated central bureaucracy that deals with state subjects could be whittled down at the same time.