Budget 2009: For India to grow, Govt will have to continue spending

7 Jul 2009, ET Bureau

This year’s budget numbers ought to have been printed in red. The fiscal deficit was a huge 6% of GDP in 2008-09 and is slated to go up to 6.8% for
2009-10, the highest ever. Add the states’ borrowing, which is roughly 4% of GDP, and off-budget financing of assorted subsidies, the combined fiscal deficit is likely to be close to 12% of GDP.

Scary? Well, it’s like a shot of brandy for someone who’s come out of rehab for alcohol abuse, but gets caught in a freezing snowstorm: right now, that jolt of liquid fuel is needed, but the patient needs to be swiftly weaned off the stuff. When the global economy still stalls, for India to continue to grow, the government must continue to spend.

The problem is that the government has not indicated how it would bring down the fiscal deficit to 5.5% of GDP next fiscal and 4% of GDP in 2011-12. Talking to ET NOW, the finance minister said that he expects growth and tax reforms to do the trick for him. This is not entirely unrealistic, given that the government gives away 69% of the tax due to it, on account of assorted concessions, bringing down the effective rate of tax barely above half the nominal rate. But such aggressive correction of the tax structure is not envisaged in the medium term fiscal policy projection that tax receipts would go up to 12.4% of GDP in 2011-12.

The government’s response to global developments last year — oil price spikes and, later, financial meltdown and economic slump — led its total expenditure to go up 20% over original budget estimates, even as its revenues fell short of BE levels by 9%. The fiscal deficit for 2008-09 shot up to 6% of GDP, 3.5% higher than the budgeted level. Worse, the revenue deficit, which had shrunk to 1.1% of GDP, shot up to 4.4%. This is slated to go up further to 4.8% of GDP now, thanks to a deliberate decision to lower the Centre’s tax burden on the economy to 10.9% of GDP from 11.6% achieved in 2008-09, to keep the economic momentum going.

Interest payments account for 56% of the projected fiscal deficit. What this brings to the fore is the urgency to speed up disinvestment. While disinvestment works exactly like government borrowing when it comes to mopping up private sector savings and creating a possible liquidity crunch for the private sector in the year in which it takes place, in subsequent years, it would help to bring down interest outgo. And there is the efficiency increase that would be brought about in the running of PSUs that are partly owned by the public.

Pranab Mukherjee’s budgeting is quite conservative. The budget numbers assume a nominal GDP growth rate of 10.8%. Assuming that the economy grows by 7% in real terms, that puts inflation at a meagre 3.8%. The FM could have shown a marginally lower fiscal deficit by assuming a larger nominal growth rate of GDP without losing his moorings in reality. Central government expenditure is now budgeted to grow 13% and soar to over 17% of GDP. Plan expenditure is slated to grow even faster, at 15% of GDP.