Finance Minister Yashwant Sinha is on the defensive.
His Budget has disappointed almost all segments of economic opinion,
though of course for diverse and even conflicting reasons. Further,
the stock markets, which he himself has made an important indicator
of policy correctness, have responded negatively. This has left him
in a situation where he is unclear in which direction to turn. If all
sections are to be accommodated, he would denude this year's Budget
of even the little new content it has. This is because the five measures
he considers to be the significant advances made in this Budget, namely,
the cuts in food and fertilizer subsidies, the reduction in interest
rates on small savings, the "rationalisation" of excise duties through
the introduction of the Central value added tax (Cenvat), the liberalisation
of imports and the tax on 20 per cent of export profits, would have
to be fully or partially withdrawn.
In particular, any "rollback" of the subsidy
cut, under pressure from the allies of the Bharatiya Janata Party in
the National Democratic Alliance (NDA), would amount to reversing the
only measure in keeping with the promise made in the Economic Survey
to take harsh decisions to curb government expenditures. This unenviable
situation is partly Yashwant Sinha's own making. Trapped in a fiscal
bind generated by years of financial reform, he has chosen to persist
with and advance the reform rather than seek to reverse it and extricate
himself from a hopeless situation.
In keeping with this strategy, in the run-up
to Budget, the Government - through its spokesmen and the Economic Survey
- had made it clear that the reduction of expenditure and of the fiscal
deficit is the fiscal task of the moment. Despite this, the Budget could
not proceed too far in this direction. Total expenditure of the Central
Government, which had risen from Rs. 279,366 crores in 1998-99 to Rs.
303,738 crores in 1999-2000, is slated to rise further to Rs. 338,436
crores in t he next financial year. The projected 11.4 per cent rise,
which is higher than the 8.7 per cent rise of the previous year, has
been seen as a failure to ensure an adequate degree of fiscal correction.
This has constituted the principal ground for
criticism of the Budget by many industry and academic experts. This
approach is based on two presumptions. First, that a reduction of the
fiscal deficit as part of a strategy of financial reform is the main
task facing the Government. And second, that the failure of the Government
to execute that task is the result of "excess" expenditure. It hardly
bears stating that in a context in which growth in the commodity-producing
sectors has been sluggish and in which there has been virtually no progress
on the poverty reduction front during the 1990s, the Budget must above
all be seen as a means to trigger growth and alleviate poverty.
The obsession with the fiscal deficit and expenditure
reduction amounts to downplaying these more fundamental objectives.
In fact, the objectives of growth and poverty reduction call for more
expenditure rather than less, even if it involves a larger fiscal deficit.
And, given the large stocks of foodgrains with the Government and the
comfortable level of foreign exchange reserves, it is more than likely
that such deficits would result in higher levels of output rather than
in inflation. The fact that the increase in expenditure resulting from
the implementation of the Fifth Pay Commission's recommendations has
been accompanied by unusually low rates of inflation is one indicator
of this. And higher GDP growth in turn would mean lower fiscal deficit
to GDP ratios.
At first sight it appears that the Finance Minister
can take credit for having increased expenditures during his tenure,
his public rhetoric notwithstanding. The expenditure to GDP ratio, which
fell from 19.2 per cent to 14.8 per cent between 1989-90 and 1997-98,
has in fact risen over the last two years, and is expected to touch
15.8 per cent in 1999-2000. However, a closer look at the components
of the Government's expenditure suggests that this reversal has occurred
not because of, but despite, the Finance Ministry's efforts to the contrary.
For example, right through the reform years, the ratio of the government's
capital expenditures to GDP has almost consistently fallen, from a high
of 5.9 per cent in 1989-90 to a dismal 2.6 per cent during the current
financial year. On the other hand, the ratio of revenue expenditure
to GDP, after having fallen from 13.3 per cent to 11.7 per cent in 1996-97,
has risen sharply thereafter to touch 13.1 per cent in 1999-2000, which
is close to its 1989-90 level.
But even here the increase is in large part
on account of larger outlays on interest payments. Until 1996-97, interest
payments were continuously rising as a share of GDP, whereas the rest
of revenue expenditure was on the decline. It is only after that, with
the "unavoidable" implementation of the Pay Commission's recommendations,
that the rise in interest payments has been accompanied by a rise in
revenue expenditure net of interest. Thus the only expansionary impulse
provided from the fiscal side is a result of the Pay Commission's recommenda
tions, which, together with the good harvest of 1998-99, has contributed
to the modest recovery in industrial growth in recent months in the
midst of extremely low inflation.
Two lessons can be drawn from that experience.
First, the expansionary stimulus from the state has to be sustained
if the recovery is to continue. And, second, a conscious effort must
be made to reduce the share of interest payments in the "expenditure"
of the government. An expansionary stimulus, in the form of more public
expenditure, can be financed in two ways: greater resource mobilisation
through taxation and a higher fiscal deficit. The strategy of economic
liberalisation, however, militates against the first option. Not only
are customs duties being reduced consistently as part of import liberalisation,
but a range of direct and indirect tax concessions have been provided
over time, resulting in a fall in the net tax-GDP ratio at the Centre
from 7.9 per cent in 1989-90 to 5.9 per cent in 1998-99. The rise in
oil prices and the slight economic buoyancy referred to earlier have
helped raise this figure to 6.5 per cent in 1999-2000.
The feeble effort made in the Budget to sustain
this trend by raising the surcharge on income tax and bringing export
incomes into the tax net has, as expected, been received adversely by
those who see it as an unnecessary intrusion of the state into private
activity. The net result of the trends in taxation and expenditure has
been that the fiscal deficit at the Centre has proved stubbornly resistant
to reduction, rising from 4.9 per cent in 1996-97 to 7.0 per cent in
1999-2000. (These figures differ from those quoted by the Government
in the Budget papers, since these are based on the older definition
of the fiscal deficit which includes all the small savings accruing
to the government, a part of which is transferred to the States.)