By M K Venu
A well-known business news channel commentator used a cricketing analogy to suggest the stock markets were expecting a Dhoni-like slog by Finance Minister P. Chidambaram, who seemed content to play defensive like Rahul Dravid. So the stock markets did not appear to be satisfied with the substantial fiscal correction effected by the finance minister, which really was the core theme of the 2013-14 budget. The real achievement on the fiscal consolidation front is a psychological shift in the mindset of investors and rating agencies that the fisc is on the mend. Only six months ago, no analyst in Mumbai gave even 1 per cent chance to the fiscal deficit for 2012-13 being anything less than 5.8 per cent of GDP for 2012-13.
The scare, then, was all too real, with rating agencies threatening to reduce India to junk status. If you assess the budget against that backdrop, the positives cannot be wished away. The fact that the fiscal deficit has been brought down to 5.2 per cent of GDP this year and is pegged at 4.8 per cent of GDP for the coming fiscal, as per the roadmap suggested by the Kelkar committee, should be commended. Some analysts are questioning the feasibility of the numbers put out by the finance ministry. The main doubt is about how the finance minister would meet the fiscal target of 4.8 per cent of GDP in 2013-14, in spite of having projected about 16 per cent growth in total expenditure. Many analysts have said the expenditure growth looks a bit optimistic, especially against the backdrop of a 19 per cent increase in revenue growth. The logic being put forward is that the budget somewhat overestimates the nominal GDP growth at 13.4 per cent -6.4 per cent real growth and 7 per cent inflation. It is possible to get 16-18 per cent revenue growth on that growth base. After all, revenue growth is about 12 per cent this fiscal on a GDP growth of 5 per cent. So all the numbers are predicated on a substantial GDP upturn.
Also, one gets the feeling the finance minister has done some conservative accounting to show more than adequate growth in expenditure so he may have some cushion to cut back unspent monies in the Centrally sponsored schemes and so on. If the growth assumption fructifies, the revenue and expenditure estimates will also fall in place. If the UPA government ensures necessary clearances for all pending infrastructure and energy projects, the GDP growth of 6.4 per cent just might materialise, on a low base of 5 per cent in 2012-13.
Overall, the Union budget can only do so much in addressing some of the key structural weaknesses that have developed in the economy in recent years. For instance, in just the last three years, India ranks among the worst performers, globally, in managing inflation and its current account deficit. Even the RBI is describing India’s high inflation, especially in the time of a severe growth slowdown, as a big puzzle. The unprecedented current account deficit expected this fiscal, of over 5 per cent of GDP, has become a major risk factor in attracting future foreign investment flows. We have made ourselves vulnerable because, with such a high current account deficit, India will need $85 billion of net capital inflows to have a positive balance of payments equation. India has managed to get about $75 billion so far this fiscal, aided by healthy net FII inflows, close to $30 billion this financial year. However, FII inflows in the stock market can be fickle and have shown massive year-to-year volatility in the past. This is a key area of vulnerability for India. The budget focus on fiscal correction, especially the drastic reduction of oil subsidies in the near term, is aimed at reducing the current account deficit in a more durable manner. This is one structural correction that cannot wait even a day. It is ridiculous to import $140 billion of crude oil annually and bulge the current account deficit only to enable the rich to run subsidised diesel SUVs, for trading cartels to steal the bulk of the kerosene subsidies, and for restaurants to use subsidised LPG.
These structural weaknesses, in both the domestic and external sectors, have built up over some years because of the political/ legislative class’s collective complacency with regard to ensuring India’s continued economic competitiveness in the cut-throat world of global business. The economic survey, perhaps deliberately, has put a telling graph on the cover that compares India’s global competitiveness vis-a-vis other emerging economies like South Korea and China. It shows how, in other emerging economies, largely due to higher competitiveness and productivity, there is a big surge in exports as a share of global trade. In India’s case, the graph is flattish and doesn’t rise northward at all even after two decades of reasonably high GDP growth. This critically indicates that India’s competitiveness in the global marketplace has stagnated, perhaps even declined, in recent years. It shows in the consistent decline (of 25 per cent) in the rupee’s value in recent years. A depreciated currency should normally help improve exports. But India is perhaps the only big emerging economy to have registered negative export growth the first seven months of 2012-13. Other emerging economies in Asia have shown positive export growth under the same condition of global slowdown. Chief Economic Advisor Raghuram Rajan has chosen to particularly emphasise this on the cover of the survey.
So the finance minister can at best provide an enabling environment through the Union budget and other policy frameworks that lie in his domain. The political and bureaucratic class need to pull in the same direction over the next few years, irrespective of which coalition is in power, to reverse some of the structural weaknesses that have become embedded in the political economy. As I said earlier, these go beyond the remit of a single budget presentation. There is a lot of painstaking hard work ahead, at the day-to-day micro level, for the UPA and other future governments to ensure that India regains its global competitiveness by working towards a new productivity paradigm that will generate both growth and employment. The economic survey and the Union budget serve as grim reminders that there is a dire need for renewal in the way we think and run our political economy.
As published in The Indian Express