The state of the economy is back in high focus. Doubts have been expressed whether the macro numbers, particularly the growth prognosis outlined in the Budget, can be realised. The sustainability and the financing of the high current account deficit (CAD) have evoked conflicting responses. Once again there are suggestions of heading towards a 1991-type crisis.
Prime Minister Manmohan Singh’s recent statement that compulsions of coalition politics will not stymie key reforms is reassuring. Only tangible action over the coming months will prove if he can ‘walk the talk’.
So what are the key macro variables? How realistic are the finance minister’s expectations?
First, the commitment to return to the path of fiscal rectitude. A sustainable fiscal deficit is a key macro variable. One can quibble about what is a sustainable number, the quality of expenditure whether asset creating or not, and its synchronisation with the business cycle. No one, however, disagrees that a fiscal deficit of 8% for the Union needed significant correction.
The commitment to ensure a 5.2% fiscal deficit for the central government this year and 4.8% for the next year with a revenue deficit of 3.3% needs many difficult decisions. The fiscal arithmetic itself is a tight balancing act given past experience where both fuel and fertiliser subsidies were severely under-budgeted. In 2012-13, the revised oil subsidies were more than double the budget estimates and the requirement for the fertiliser subsidy was 50% more than the initial budget provision. Staying the course with unpopular decisions on kerosene, fertiliser and diesel will be challenging.
Expenditure compression has been the principle agent for achieving last year’s fiscal numbers. The revised estimates were R60,000 crore below the budget estimates. The current year budget estimate may look higher than the revised estimates by 16% but in effect it is 11% over the budget estimate of the last year. When reckoned against inflation there could be reduction in real term in some sectors.
In essence the new expenditure management policy reflects the huge weakness in our implementational capabilities. Large sums of money remained unutilised in the pipeline, adding to borrowing costs. The tightening of expenditure norms with one month’s release at a time minimises this waste. However, our system is not yet geared to ‘just-in-time’ money. Many processes need to be fine-tuned, particularly timely utilisation certificates. The new expenditure paradigm casts new obligations on spending ministries to restructure their expenditure patterns to ensure that while project financing does not suffer, monies do not remain idle either.
Managing inflation and more importantly anchoring inflationary expectations are also contingent in credibly managing the fiscal deficit and improving supply side response, particularly for containing food inflation, which is again becoming worrisome.
Second, the sustainability of CAD, namely the gap between payment for imports and exports earnings including the invisibles. The CAD of just 0.3% in 2007-08 has progressively deteriorated to 6.7%. It is worse than any other emerging market. Fortunately, inward portfolio flows have enabled its financing without deterioration in our reserves or debt to GDP ratio even though short-term debt as a percentage of total debt has worsened. Sustainable financing of this deficit without excessive reliance on short-term reversible volatile portfolio flows has contingent risks. Imports have remained stubborn given oil prices and continued preferences for the yellow metal in relation to other instruments. Imposition of import controls would be counter-productive. There is, however, a need to improve export performance. Unfavourable global markets are not an India-specific phenomenon. In 2011, India’s share in world merchandise export was a meagre 1.7%, compared to China’s 10.4%. We have the ability both to diversify market and products even in a stagnant world economy. New policy initiatives and fostering labour-intensive manufacturing can make a decisive difference.
What about the growth prognosis outlined in the budget, namely 6.1-6.7% in the current fiscal year? Clearly the savings and investment ratio which had reached 38.10% of GDP in 2008 is currently stagnant at 31%. This needs to be increased to at least 35% to get to the desired growth numbers. Managing the new subsidy regime would be crucial in reducing public dissaving. Slippage in growth rates has consequences beyond revenue and fiscal deficit. It would detract from the revival of the India story.
So going forward what are some of the tangible steps.
* We have changed the fiscal consolidation map too many times. Government must commit to seeking not ex-post but ex-ante parliamentary approval for deviations from the fiscal path. An independent monitoring by constituting the fiscal council suggested by the 13th Finance Commission will comfort markets.
* Apart from the direct tax code (DTC) and goods and services tax (GST) being fast-forwarded, issues like categorisation of FDIs and FIIs needing companies to undergo significant restructuring in their shareholding must be resolved. We need a drastic review of FDI sector caps. In my FDI Report in 2004, I had argued that in an interdependent world, many of these sector caps were anachronistic and counterproductive. You cannot have energy security without fundamentally reforming the coal sector.
* The new export map strategy to be outlined by the commerce minister must be credible and innovative to trigger short-term benefits.
* Pending legislations like pension, insurance and company Bill must receive government’s high priority in the second part of the Budget Session.
* The finance minister’s present exercise in incentivising foreign investors with road shows both before and after the Budget must be part of this concerted strategy. Early resolution of high profile disputes like Vodafone can be reassuring in a fragile investor environment.
Restoring trust and improving competitiveness needs action beyond the finance ministry. No opposition party that seeks to come to power would like to inherit a stagnant economy which multiplies the trust deficit.
True, 2013 is not 1991 — both India and the world has changed. However, no finance minister is any more empowered than what the prime minister makes him. Who knows this better than Manmohan Singh? P Chidambaram would need this empowering to deliver on growth and to rekindle the vanishing India Magic.
NK Singh is a Rajya Sabha member and a former revenue secretary
The views expressed by the author are personal