P. Chidambaram is a man of words. The Harvard-educated finance minister delivered on his promise – made before international investors during his recent roadshows in Singapore, Hong Kong, Frankfurt and Germany — of containing fiscal deficit at 5.2 per cent of the GDP for the current fiscal and 4.8 per cent of the GDP for the next year.
For fiscal purists — the policy establishment is full of such hawks — the achievement is commendable, as their target audience mainly comprises foreign investors and international rating agencies, known for their low appetite for higher deficit.
One cannot deny that high fiscal deficit is not good for the economy as it compels the government to borrow, which crowds out private investment, but there is a serious problem if the target is met by significantly cutting down on plan expenditure promised in the last budget.
In his zeal to deliver on his deficit target, Chidambaram, who assumed the role of finance minister last August, did not spend around Rs 90,000 crore that his predecessor Pranab Mukherjee had promised in his budget for 2012-13.
The pruning of plan expenditure — the quantum is arrived at following consultations with ministries on the basis of the projects they are carrying out — cannot be justified for an economy that has been witnessing signs of slowdown.
A quick glance at the expenditure budget may give an impression that the finance minister is trying to correct the anomaly by projecting a 29 per cent hike for the next fiscal, but this number does not raise any hope.
There will always be this apprehension that the obsession to stick to the deficit target will compel the finance minister to slash plan expenditure as he will find it difficult to touch non-plan outgo, which is stickier in nature, if there are signs of revenues lagging behind the expenses.
Although Chidambaram has asked the country to be optimistic, fulfilment of the revenue targets will be easier said than done at a time there is a feeling that the economy is sinking.
In his revenue arithmetic, the finance minister has targeted a 19 per cent hike in tax and 32 per cent rise in non-tax mop-up for 2013-14 in comparison to the revised estimates of 2012-13. It is implicit in the budget that the projections are based on an assumption that the economy will grow between 6.1 per cent and 6.7 per cent in the next fiscal.
If the projections go awry and revenue targets are missed, Chidambaram will have no option but to axe plan expenditure as he will have to stick to his fiscal deficit target of 4.8 per cent of the GDP.
A slash in expenditure will have an adverse impact on growth, as consumption will decelerate, which will dampen demand and finally result in lower growth. And if the growth slips, the revenues will dip and the vicious cycle of low demand-low growth will kick in.
Chidambaram — who stated that the Indian economy has the potential to grow at 8 per cent — however, has a different game plan as he is relying on the private sector to take cues from him and start investing to kick-start growth.
The finance minister announced several measures to encourage investments in infrastructure projects — like roads, ports, power plants and industrial corridors — and gave sops to the realty sector in an attempt to push demand in the core economy.
The architect of the dream budget of 1997 — who had abolished sops to investors and introduced the minimum alternate tax to tap corporate profits — announced an investment allowance of 15 per cent for two years for companies investing Rs 100 crore or more in plant and machinery.
There is little doubt that these attempts are based on sound economic logic, but given the mixed economy characteristic of the country, these steps will deliver the desired results only if the government plays a lead role in reviving the economy. Some leading chambers had urged the government to use a part of the Rs 2.5-lakh crore investible surplus with the public enterprises to start an investment cycle in the economy.
The finance minister, on the other hand, is planning to capitalise on the government’s ownership of these entities by setting a disinvestment target of Rs 55,814 crore for the next fiscal. In view of the government’s track record on disinvestment — the mop up has been Rs 24,000 crore this fiscal — the target may seem unrealistic to many.
While it cannot be disputed that Chidambaram had a difficult job at hand and he tried to offer a best possible solution in view of his priority for fiscal consolidation, the numbers presented in the budget have raised several questions.