It is extraordinary how much of the pre-Budget speculation has focused on whether (and if so, by how much) the “fiscal stimulus” will be rolled back in the Budget for next year. Even as this debate shows little understanding of what a stimulus is, it ignores more important issues that should be the focus of debate.
To get the “stimulus” business out of the way: A fiscal stimulus is the additional deficit incurred in a year. The actual stimulus planned for this year, therefore, was Rs 73,000 crore (the difference between the fiscal deficit budgeted for this year and the actual deficit incurred last year). Bear in mind that the stimulus, correctly defined, was very much bigger in 2008-09 (about Rs 1,93,000 crore). So, a reduction in the size of the stimulus has already happened this year — despite which, let it be noted, the economy has gained momentum. If you include the much larger fresh debt that the government took in 2008-09 to finance subsidised oil and fertiliser, the debt that was not reflected in the deficit numbers, the net fiscal stimulus this year is already negative.
For next year, the finance minister is expected to reduce the deficit, as he promised when presenting his Budget last July. In other words, irrespective of whether he rolls back any of the tax cuts or not, he will be budgeting once again for a negative stimulus. And that’s how it should be, given that the economy is expected to grow by 8 per cent or more next year.
As for the incessant discussion about whether the excise and service tax rates will be rolled back up partially, such a roll-back is of course important for the industries concerned, but the macro-economic impact of any such step will be limited. At Budget time last July, the finance secretary had said that the cost of continuing with the tax cuts for another year was Rs 30,000 crore. A roll-back next year will recoup this money, or perhaps a little more. In a Budget that is already Rs 10.2 lakh crore for the current year, with a deficit of Rs 4 lakh crore, this is small beer.
The more important question, when discussing the wisdom of a stimulus, is one’s reading of the macro-economic situation. The question which this newspaper asked last July, and which bears repeating today, is whether a deficit of 6.8 per cent was necessary this year. The government’s macro-economic assumptions were manifestly pessimistic. It assumed nominal (i.e., real plus inflation) GDP growth of no more than 8.5 per cent during the year. In an interview at the time, the finance secretary said he expected inflation during the year to be between 2 per cent and 4 per cent. Taking the mid-point figure, the government did not expect real GDP growth to be more than 5.5 per cent. The official position now is that it is likely to be 7.5 per cent.
This is not just a matter of hindsight. It is worth recalling that, in the interim Budget presented in February 2009, Pranab Mukherjee had postulated a deficit of 5.5 per cent of GDP. It was in the final Budget, presented in July, that the figure shot up to 6.8 per cent, with the promise that the number would be back down to 5.5 per cent in 2010-11. It is arguable that some of the inflation that the economy has witnessed during the year, while admittedly sparked by poor harvests of various kinds, is also an indirect result of the additional deficit. Wholesale price inflation was at 8.6 per cent last month, more than twice as high as the finance secretary’s outer forecast last July.
If the macro-economic assumptions have proved wrong, what about the main action points that the finance minister mentioned in his Budget last July? These were the introduction of the integrated Goods and Services Tax (GST) in 2010, legislation on a direct tax code in the winter of 2009, changing the basis for dishing out the fertiliser subsidy, price reform for petroleum goods, and the sale of 3G spectrum to telecom companies (which was to raise Rs 35,000 crore during the year). One should leave out disinvestment, since no numbers were put in the Budget.
On the GST, the finance minister was seen as being optimistic even as he made the promise that the GST would be introduced by April 2010. It was a difficult enterprise from the start, and we know now that the schedule is off by a year.
More credible was the minister’s promise that he would release a draft direct tax code within 45 days, and, after public debate, introduce a Bill on the code in the winter session of Parliament. The code was released on schedule in August, but it threw up so many contentious issues that it is yet to be presented to Parliament.
The fertiliser subsidy regime has been changed, just in time last week, and we should see the benefit in a reduced subsidy bill next year. But although the Kirit Parikh report on the pricing of petroleum goods is in, even a partial acceptance of its recommendations is unlikely till well into the new financial year — and this is understandable, given the general inflation situation.
Finally, there is the sorry spectacle of the non-auction of 3G spectrum. Despite the finance minister’s manful efforts, the auction has not yet happened — and if it does not materialise in the next six weeks, there will be a Rs 35,000 crore hole in this year’s Budget numbers.
In summary, there is no GST as yet, the direct tax code is in limbo, petroleum pricing remains unchanged, and the 3G auction is yet to happen. Of the major promises, only fertiliser pricing has been fixed, and that just in time. This is not the picture of a government that is focused on delivering what it promises. Nor can it be said that its macro-economic reading last July was correct. One might add that the defence ministry returned unspent in 2008-09 money that had been provided for buying attack helicopters and 155 mm howitzers (apart from other hardware). Neither has been bought in 2009-10 either, so the money will be returned again.
Whether the tax roll-back starts this week is not, therefore, the main issue. The more important question is whether the finance minister and the government will do better in Year II of the UPA’s second term.
