A disappointing end to the Budget suspense

Guest post by Nida Ali

Slowing economic growth, a bloated government deficit and a desperate need to boost investment. Such were the grim circumstances under which Finance Minister P Chidambaram stepped up in parliament on Thursday to deliver the last budget before general elections in 2014. The build-up was immense and expectations were running high. Although the Budget was never going to be a silver bullet making India’s economic woes magically disappear, it did present Mr Chidambaram with the perfect opportunity to set the scene for a healthier economy and convince financial markets that the government is committed to bringing India back on a sustainable path of growth. This was seeming all the more probable because of the bold and encouraging actions taken recently, like hiking rail fares for the first time in a decade and allowing companies to raise diesel prices in small monthly increments. But in the event, the Budget disappointed, with a long list of small policy measures, but no real efforts to address the broader problems plaguing the economy.

India’s fiscal deficit has widened considerably since 2010 and the sovereign credit rating is hovering just one notch above junk status. So the threat of a rating downgrade is one of the most imminent risks to the economic outlook at the moment. Being fully cognizant of this, Mr Chidambaram was careful to deliver a “responsible” Budget, with no obvious giveaways, despite the upcoming elections next year. But the policies announced to rein in the deficit lacked vision and appear to be aimed at short-term gains. For instance, there was an undue focus on cutting capital expenditure, which according to the government’s estimates has been slashed by INR 75,000 crore in 2012/13. While this may well have the desired effect of hitting the deficit target of 5.3% of GDP this fiscal year, it is an unsustainable strategy that risks hurting the economy’s supply potential in the medium- to long-term. In the same vein, while the 10% surcharge for people earning INR 1 crore or more per annum is likely to increase tax revenues in the short-term, its effectiveness is questionable in the long-term. Not only does it raise the risk of tax evasion, it could also discourage highly paid individuals from working in India, which would eventually hurt growth as well. These policies, while barely sufficient to prevent the sovereign credit rating from being downgraded to junk status, just don’t have what is required to get the economy back to its potential growth rate of around 8%.

Instead of resorting to these quick-fix measures for bringing down the budget deficit, Mr Chidambaram would have been better off focusing on cutting current expenditure, which is a more efficient and pro-growth approach. But in this regard, he fell short of expectations of spelling out further detail on reducing fuel subsidies – a process which had already begun in September 2012 when diesel prices were raised by 45 paise per litre.

Another pressing need of the hour is to enhance private sector investment. In this respect the Budget admittedly contained a number of encouraging measures. The 15% investment allowance for a company investing Rs. 100 crore or more on plant or machinery; increased spending on infrastructure investment; and the emphasis on expediting pending investment projects by setting up a special Cabinet Committee are all, in principle, very promising. But how efficiently these measures will be implemented is debateable. For instance, there is no credible basis to believe that the Cabinet Committee will indeed deliver on the promise of removing regulatory bottlenecks for planned investment projects, while spending on infrastructure projects could easily be subject to delays as well.

The dilapidated condition of the power sector also needs urgent attention. While the intention to reduce dependence on coal imports in the medium-term by enhancing coal production through public private partnerships is broadly sensible, there was no proper detail on how this would be achieved. By way of reassurance, Mr Chidambaram felt it sufficed to say that this was under “active consideration” with further details to be announced in “due course”.

All in all, the 2013 Budget was devoid of radical ideas and was a lost opportunity at a time when the nation is teetering on the brink of an economic crisis. While Mr Chidambaram made all the right noises with regard to the need for fiscal consolidation, inclusive growth, boosting investment and so on and so forth, he failed to follow them up with credible policy responses leaving a dark cloud of uncertainty still hanging over the economic outlook.