The author is former governor, Reserve Bank of India
Economists have been famously prone to error in forecasting the future even as they successfully explain the past. The tendency to try to look into the future is, however, a genuine human failing, however inaccurate the results. Otherwise, how does one explain the booming fortunes of astrologers in India and elsewhere' In spite of such caveats, it is customary and tempting to try to have an advance look at the forthcoming budget based on available numbers and indications of economic trends. Surely, our exercise cannot expect to outguess that of Jaswant Singh, whose aides have been working for months on the details of estimation, but we can at least make an informed guess.
While on this exercise, I am reminded of a naïve, but well-intentioned, initiative in 1986, which V.P. Singh started as finance minister. He called on members of the public to fill in the blanks in a statement in which Singh gave the broad details of the latest budget estimates and asked for best estimates for the next. It all looked like a crossword puzzle, except that one had to fill in numbers. His attempt attracted a lot of attention. Entries were eligible for a prize if the deficit guessed in them came closest to the actual outcome. The public was little informed about the trends of expenditure and revenue. Luck, no doubt, favoured a few. V.P. Singh’s exercise was a trendsetter. It was the first, albeit hastily-conceived, attempt to involve the public in the budget process. Jaswant Singh has gone much further with his mid-year review and above all the Kelkar task force report. But, the budget still remains an exercise in the estimation of numbers.
Notwithstanding cautionary lessons of experience, the exercise is worth making, at least at an intellectual level, to assess and appreciate the magnitudes of major budget items. Accuracy, even remotely close to that of the North Block exercise, is ruled out. But, considering the law of large numbers, our marksmanship may not be far off.
First, let us make our assumptions clear. We assume, as a first cut, the rates of tax to remain unaltered and take them into account in the next pass, including therein the Kelkar effect. We also assume that the trend of growth will follow on an average the increases that we have seen in the last few years, both in respect of revenue and expenditure. True, the state of the economy has of course a great deal to do with the revenue estimates. But, let us assume, for our purposes, that economic growth will remain at the same stodgy level next year, as it has been over the last two. Expenditure estimates are more tricky. I will get to details of some of the items in the following paragraphs.
To get a fix on the budget numbers, we must first make an estimate of tax revenue. Total tax revenue, net of allocations to the states, has been running at a trend level of around Rs 170,000 crore, showing an increase of 26 per cent over the last two years. Assuming a rate of increase of 15 per cent for next year, 2003-04 can see a tax revenue of Rs 200,000 crore. The other significant component of review is non-tax revenue, which accounted for Rs 72,000 crore in budget estimate for 2002-03 and can be expected to rise by 15 per cent to Rs 90,000 crore. On this basis, the total revenue for 2003-04 can be estimated at Rs 290,000 crore.
Expenditure is a bit more tricky to estimate. The estimate 2002-03 provided for Rs 270,000 crore on the non-plan side, out of which interest alone accounts for Rs 117,000 crore, major subsidies for Rs 40,000 crore and defence (revenue), such as salaries, maintenance and transport items for Rs 44,000 crore. Interest expenditure is bound to rise, even given current low rates. We have at least to provide for interest for the additional borrowing of more than Rs 100,000 crore made in the current year. Taking this into account, we may provide for interest expenses of at least Rs 125,000 crore even after allowing for the softer interest rates. Subsidies also show no sign of decline with elections on the horizon. I am conservatively putting defence (revenue) expenditure at only Rs 45,000 crore compared to Rs 44,000 crore in 2002-03. Border tensions may make this unrealistic.
In addition to non-plan revenue expenditure, there is the plan revenue expenditure on essential social and educational sectors, which counts for nearly Rs 50,000 on Central plan. Since this involves the soft sector, there is likely to be pressure to increase it. Taking all this into account, and the increasing pressures to raise Central assistance, I have estimated the total revenue expenditure for 2003-04 at around Rs 380,000 crore, compared to Rs. 340,000 crore in 2002-03, the bulk of the increase being on Central assistance, defence revenue and plan account. This results in a revenue deficit estimate for 2003-04 of Rs 90,000 crore compared to Rs. 95,000 crore in 2002-03, an optimistic outcome.
In addition to meeting revenue deficit, we have to provide for capital expenditure. The broad profile of capital expenditure on the plan has already been determined during the discussions with the planning commission and estimates of resources, which can be raised by the public sector undertakings. One of the important components of capital expenditure is that on defence, which is expected to reflect current security threat perception. We can estimate defence capital expenditure to remain at around Rs 22,000 crore, the same as in 2002-03. Taking all these factors into account, the total capital expenditure in 2003-04 can be estimated to be around Rs 80,000 crore, compared to the budget estimate for 2002-03 of Rs 70,000 crore.
Fiscal deficit is the difference between total expenditure and total revenue. It can also be seen as the sum of revenue deficit and capital expenditure. We have also to allow for loan recoveries as a set-off. The capital expenditure net of loan recoveries, which was Rs 52,000 crore in 2002-03, is estimated to be Rs 72,000 in 2003-04. Divestment proceeds are expected to remain the same as last year, at Rs 12,000 crore. These, deducted from the sum of revenue deficit and capital expenditure net of loan recoveries, make the projected net fiscal deficit Rs 150,000 crore, against Rs 135,000 crore in 2002-03.
It can be broadly estimated that fiscal deficit in 2003-04 will be higher than in 2002-03. If there is a lower growth in gross domestic product, the fiscal deficit-GDP ratio will increase. This will, no doubt, ring alarm bells. What is clear from the above very rough exercise is that the estimates of proceeds from divestment are not per se too important for determining the size of fiscal deficit. Much more important are estimates of tax revenue, non-tax revenue and expenditure, particularly on interest, subsidies and defence. Some purists also argue that divestment proceeds are not really in the nature of revenue since they are sales of capital assets and that they should not be taken into account for assessing fiscal deficit.
To estimate the ultimate size of the budget deficit critically depends on how the government contains the growth of subsidies, defence expenditure and of course, establishment. Its degrees of freedom on determining the size of interest outlays as well as defence are limited. The outcome of Jaswant Singh’s budget for 2003-04 will, however, turn mainly on his success in controlling those items.
The billion-dollar question remains, what will Singh do to stimulate the Indian economy' Will he dare to adopt, given the gloomy picture on fiscal deficit, the Kelkar prescriptions even with all its faults or in a fractured from' Will he give more incentive for corporates to expand their capital expenditure' Will he tweak the capital market' To these questions, our number-crunching exercise cannot attempt a definitive answer. Advisedly, they fall in the realm of political economy.
As laymen, we should be content with getting an idea of the gargantuan problems that the finance minister of India faces as he finalizes his budget. We must realize that the finance minister truly bears a crown of thorns. Let us hope that our fears turn out to be false and that Singh will be able to unveil a rosy budget outlook for the country for 2003-04. Let us hope that the budget will help the economy to break its accustomed slow pace of growth. The numbers do not look encouraging, but an inspired finance minister can breathe new life into uninspiring numbers with fresh ideas and new initiatives.