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Friday, March 1, 2013

Budget 2013-14: A Well-Meaning Attempt to Navigate Growth Through a Crisis

Proclaiming, “…we must unhesitatingly embrace growth as the highest goal … without growth there will be neither development nor inclusiveness,” Union Finance Minister Chidambaram presented his budget for 2013-14, well resisting the political compulsions of his government that is going to face the elections in a little over a year.

He went on to prove his known stance for fiscal contraction, even when the growth of the economy is today on a downward trend, by containing the fiscal deficit for 2012-13 at an acceptable level of 5.2 percent of GDP and proposing to reduce it to 4.8 percent of GDP in 2013-14. But if one looks at how he achieved this fiscal consolidation for 2012-13, one feels quite disturbed, for it was achieved more by reductions in the much-needed plan expenditure—plan spending during 2012-13 was 20 percent lesser than the budget estimates for the current fiscal. And these cuts are across the board, including important sectors such as industry and minerals, science and technology, and even agriculture and rural development. But that being history, nothing much can be done except to watch for the unintended consequences, if any, and ensure their effective management.

Coming to the proposed budget for 2013-14 and the fiscal deficit reduction therein, it must be said that the proposed consolidation is again a bit enigmatic: the FM aims to shrink the fiscal deficit through an increased tax collection, that too, by about 19 percent in a growth scenario that is hardly pegged at around 13 percent over the growth in GDP in 2012-13. Nor does he propose any new taxes, except for a surcharge of 10 percent on high-income individuals and the corporate. Secondly, the budget also proposes to increase the Plan spending by about 29 percent. Now, the obvious question is: Are there sufficient resources to meet the twin objects? Of course, there would be lesser demand for funds under the head fuel subsidy, for he proposes to eliminate fuel subsidies. Even then, mobilizing additional resources to contain fiscal deficit at the proposed 4.8 percent of GDP will be a tall order: If the GDP under-performs (from the projected @ 6.1-6.7 per cent), or the global oil prices shoot up further or, rupee devalues further owing to sharp fall in FII's investment  or widening CAD deficit for whatever reason, everything becomes topsy-turvy. 

That said, knowing Chidambaram’s commitment and his will to restore fiscal sustainability and macroeconomic balance, one can be sure of his achieving the objective of containing fiscal deficit at 4.2 per cent of GDP during 2013-14. But its unintended consequences, if any—such as cut in governmental investment under Plan spending, the resulting fall in employment creation, and rise in international fuel prices fanning domestic inflation—should not undermine the welfare of common man, particularly in the year preceding the elections, for, should that happen, there is a danger of his own party men calling for tinkering with the objectives. So, it’s going to be a big task for Chidambaram to steer the budget implementation with more dexterity—the task of execution assumes a great challenge than even his drafting the budget.

Chidambaram, by succeeding in containing fiscal deficit through reduction in unproductive expenditure such as subsidies rather than increase in tax income alone, is more likely to create confidence in the Indian economy among the international investors and thereby might pave the way for more Forex inflows that are badly needed in today’s context of alarmingly widening current account deficit. But for this to happen in a sustained way, he should not rest complacent with budget execution alone but also aim, as mentioned in his budget speech, to take up pending bills such as Direct Taxes Code Bill, Pensions and Insurance sector regulations/reforms, etc., for that alone can create a better investment climate. It is to be stressed here that the opposition parties must show political maturity in supporting the government in doing the right thing for the good of national economy rather than opposing everything merely because they are in opposition.   

Now coming to what in the budget is not appealing to a rational mind is his proposal to set up India’s first women’s bank as a public sector bank by providing Rs 1000 crore as initial capital. This does not sound rational because: one, the exchequer is already saddled with enough headaches from the existing PSBs — as against the estimated requirement of Rs. 90,000 crore as additional capital to be infused into PSBs for making them Basel III-compliant, the finance minister could hardly provide for Rs 14,000 crore in the current budget; two, creation of additional infrastructure only eats into investable capital by way wages and administrative costs, as is the experienced with Gramin Banks; and three, what is needed in a mature economy is an integrative approach but not segregation to cater to the needs of its citizens. It is an irony that we are attempting inclusiveness through exclusiveness. Over and above it, once established it would become a permanent drag on the budget as are the Gramin banks today doing nothing to gloat about. The rest of the budget proposals are, of course, neither better nor worse, for they are almost like in any other ‘conventional budget’, warranting little or no comment.

Interestingly, Chidambaram commended his budget to the nation quoting Vivekananda: “All the strength and succor is within yourself. Therefore make your own future.” Now it is for leaders like Chidambaram to fulfill that wish—the wish of sustaining macroeconomic balance for a better growth so that more employment can be offered to the youth to realize the benefits of the so called demographic dividend as also reduce poverty to tolerable levels   “with steadfast will and mind unslumbering.” 

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Keywords- Union Budget- 2013-14, India's Fiscal Deficit , Mr. Chidambaram, Finance Minister


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