PC's Budget in no way a tightrope walk

For those who believed that Finance Minister P Chidambaram’s Budget was a tightrope walk, here are a few facts and related figures to counter them.

Despite financial constraints, his Budget showed a populist leaning and his Budget speech sent signals that a lot of largesse were in store for those who counted ahead of elections in 2014. But, there was a little description on how to fix some more structural problems ailing the economy.

Three problems — persistent inflation,  soaring government expenditure drying up necessary investments and rising imports eating up foreign exchange reserves — needed urgent course correction when Chidambaram took over in August last year. He tried to address some of them and took long pending decisions which were hurting investments on Indian soil and affecting growth. 

This raised expectation among various segments of people that going forward, the government may address some more pressing and structural problems in the economy that take care of the rich and the poor alike. It also gave rise to the aspirations of the poor and middle-class that the persistent problem of inflation, which had eroded their purchasing power, will be addressed in the near future.

The investors felt that the government, grappling with a high current account deficit and in need of more foreign capital, would give concessions to them and make India a little less costlier for doing business. The year came to a close and the time for budget started approaching fast, Chidambaram kept saying there was no fiscal space for the government to give largesse and that his budget has to be more responsible in the wake of large deficits staring in the face government.

But, did that really happen when the budget was presented? There was a pressing need to come out with measures to control the gaping trade gap to avoid a balance of payments crisis in the future. The current account deficit (CAD), at a historical high, worried the finance minister, going by his Budget speech, but there was no mention of what measures he is going to take to enhance foreign flows — FII, FDI and ECB — needed to arrest the rising CAD.

Missing the exports bus

In fact some of the provisions in the finance bill stoked confusion whether they were going to choke fund flow through the most preferred Mauritius route. “The minister seems to have missed both aggressive export promotion and active import substitution as the more structural and self-reliant solutions to CAD. There is nothing in the Budget which focuses on either or both of these,” said Ramdeo Agarwal of Motilal Oswal Financial Services said.

But, the figures from the fineprint of the budget document showed an allocation of a  whopping Rs 97,134 crore towards "gender budget" without any immediate identifiable goal. Contrary to this, Rs 2,250 crore was allocated to mobilise agricultural investment, that too at a time when the latest government data showed the economy fared 4.5 per cent in the October-December quarter on the back of a declining performance in the farm sector among others. And, the 12th Five Year Plan suggested the need to raise agricultural investment and help rainfed farms and indebted farmers.

The staggering gender Budget, along with the announcement of an all women’s bank and a special women safety fund. This may raise questions on Chidambaram’s intent as  women form nearly half of India’s population and in 2009 general election, the number of registered voters was over 340 million. Incidentally, the provisions also came soon after the party suffered a severe dent in its image post the Delhi gangrape case.

 Likewise, the UPA’s flagship Food Security Bill, which came under critics' scanner for being allotted only Rs 10, 000 crore in the budget, carried a lot of promise from the finance minister for more future allocations. Chidambaram, during his Budget speech and the post-Budget press conference kept emphasising that the Food Security Bill was close Congress’ heart and that he was ready to show his generosity if the need arose in the middle of the year.

“Budget is not a one-stop or one-step measure and is a continuing process and more measures and decisions will be announced during the passage of the Budget and Finance Bill in Parliament," Chidambaram said, apparently promising to exhibit his large-heartedness as the year progresses and the country comes closer to elections.

The areas where his Budgetary proposals could not exhibit any firm commitment remained the ones which kept the economy on the tenterhooks and continued to pose threat to economic stability, said analysts.

Inflation chasing demand

Inflation, which aggravated in the past years due to boost to consumption even as the investment climate was allowed to deteriorate and supply could not keep pace with the demand, found no clear cut mention in the Budget on how the finance minister was going to deal with it.

 Besides, a steep reduction in the petroleum subsidy from Rs. 96,880 crore in 2012-13 to Rs. 65,000 crore in 2013-14 will feed into the costs of a range of products and aggravate inflation in the short run.

The huge slump in economic growth in the third quarter, a result of persistent inflation, low savings, government deficit and tightening of monetary policy, got no clear direction on how the government was planning to arrest the fall in the gross domestic product.

All that Chidambaram’s Budget speech and his subsequent press interactions went on to focus was his excessive optimism that the world economy will correct itself in the coming year and the domestic conditions will improve. The Economic Survey projected an average GDP growth rate of 6.4 per cent for 2013-14, but the prevailing rate of growth in the Indian economy does not support the optimism of the survey and the ministry.

The only area where Chidambaram could keep his promise was the fiscal deficit numbers, the fiscal deficit was contained at 5.2 per cent of the GDP in 2012-13.
This was necessary to win investors abroad and global rating agencies, which had threatened to downgrade India’s economy. But what about those issues which need some permanent and long-term solution, such as inflation? The humongous fiscal deficit is very much an offshoot of chronic and persistent inflation and consequent fall in savings.