Saumitra Chaudhuri &=
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Economic Advisor
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nbsp; February 16, 2009
26 K G Marg,
A Budget that Preserves
Constitutional Etiquette and Does the Job
The spectrum of expectations in business circles a=
nd
the media in regard of yesterday’s Interim
Budget ran to the very wild. That is part of the problem of unfamiliari=
ty
with nuances of procedure and context. Many of us sometimes suffer a basele=
ss
certainty of how to do other peoples’ jobs, which is based on an
ignorance of how the system works. In our Parliamentary system, an Interim Budget is just that: Interim derives from
“inter”, that is, between two governments. The outgoing governm=
ent
leaves the prerogative on tax rates and new expenditures to the next one th=
at
will be formed after the elections. To do otherwise is improper.
How about the argument that the conditions are
extraordinary? It is a lame one. The crisis broke in September 2008. The
government had time to sort out how it wished to respond, and it implemente=
d its
decisions between October and December 2008. It could have, had the situati=
on
so warranted, issued an Ordinance(s) to amend say rates or provisions in the
Income Tax Act, if that is what it wanted to do. Now, why should it hold so=
mething
over and put it in its Interim Budg=
et
in mid-February? Any such inclusion would not only have been far from urgen=
t,
but it would have served propriety and precedence poorly. And it would have
smacked of electoral politicking. Which is why at para 48, the Finance Minister’s speech reads: “Cons=
titutional
propriety requires that (the) new Government formulates the tax and expendi=
ture
policies for 2009-10”.
Next is the issue of the great “fiscal”
push. There is little disagreement that when an economic or financial crisis
erupts, governments need to step in and provide fiscal support to cushion t=
he
economy from the worst of the effects of the downturn. But as we argued in =
our
column last week, in the final analysis, “fiscal stimulus” can =
only
alleviate the pain, by putting a floor under the downturn; it cannot substi=
tute
for the natural economic buoyancy that drives the growth process forward. F=
or
that business confidence and private investment has to come back into play
– and it will take a while.
The revised estimates place the central government=
fiscal
deficit at 6% of GDP in 2008/09. To this we must add the Rs 95,942 crore of=
Oil and Fertiliser Bonds, which brings the central government’s t=
rue
deficit to 7.8% of GDP. That is a very big jump from 3.5% in 2007/08, inclu=
ding
Oil Bonds. For 2009/10 the Interim Budget provides an estimat=
e of
5.3% of GDP as the fiscal deficit and we hope there will be no Oil and Fertiliser Bonds next year. If we add to this the State governm=
ents’
deficits we are looking at a total increase in government borrowing of about
10% of GDP in 2008/09 and perhaps 8% next year.
These are extremely high levels of government defi=
cits.
If such a large component of our domestic savings are consumed by government
there will be little left for the private sector and economic growth will
stall. However, the Interim Budget<=
/i>
assures us that these high deficits are temporary. At para 68 the Minister says “conditions in the year ahead a=
re
not likely to be normal and, therefore, the high fiscal deficit is inevitab=
le.
We will return to FRBM targets once the economy is restored to its recent t=
rend
growth path”. Let us hope so.
We in India are very vulnerable to the siren song =
of
fiscal pump priming. For many decades the dominant thinking in India advoca=
ted usurpation
of financial resources by government and we got the results we got. It took=
a
long time for us to come to the common sense and sober view that government=
spending
should be subject to prudent restrictions and if public spending takes up t=
oo
much of our financial resources, private sector spending will suffer and gr=
owth
will stall. Fiscal consolidation and other sensible economic policies have
given us growth. We need to use fiscal instruments with great care, so that=
we
do not become addicted to it once again.
[Total number of words excluding title: 671]
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