Let there be no doubt about it. Finance Minister P Chidambaram’s final full-fledged budget is oriented to bolster the UPA government’s fortunes in the forthcoming national elections. This has influenced him to further loosen the purse strings and step up aam aadmi giveaways in his budget. A case in point is the massive waiver of farm loans. This compulsion also has entailed huge spending commitments in the UPA’s flagship programmes like the National Rural Employment Guarantee Scheme and Bharat Nirman while seeking to adhere to the discipline of the Fiscal Responsibility and Budget Management (FRBM) Act, according to which the revenue deficit must be eliminated and fiscal deficit cut to 3 per cent of GDP by 2008-09. Whether Mr Chidambaram can indeed reconcile these objectives with setting the government’s finances in order, however, is the proverbial Rs 60,000 crore question.
That said, there are a number of positives in the budget. The fact that the economy has grown robustly at an average of 8.8 per cent per annum during the last four years has, no doubt, provided a favourable context for all of Mr Chidambaram’s budgets. Faster growth has led to buoyancy in tax revenues, which has enabled him to fund the various welfare schemes mandated by the National Common Minimum Programme. But with evidence of a slowdown in growth to 8.7 per cent this year, the Finance Minister has designed a fiscal boost to consumption by raising the exemption limit for income-tax payers — leaving more purchasing power with the middle- class — while lowering excise duties on industrial goods like small cars, two-wheelers, buses and so on. This will definitely brighten the longish faces in the industrial sector while maintaining an even keel on the price front.
But the biggest focus of budget 2008-09 is the agriculture sector. While this makes for good (and unsubtle) politics, it makes for very decent economics as well. At a time when farm growth has slumped to 2.6 per cent and there is a raging agrarian crisis — with farmer suicides on the rise — there is a sound political-economy case for addressing the various problems in this sector, including waiving farm loans. Critics are grumbling that this will destroy the ‘culture of credit’. But this measure was timely as it was needed. True, it is a one- time sop. But the real requirement is to follow it up with measures that address the root causes of distress in the countryside — including a comprehensive crop insurance scheme and a massive step-up in institutional credit to reduce the growing dependence on money lenders. More importantly, there is a need to step up public investment in irrigation to reduce dependence on the monsoons.
Given the compulsions to spend ahead of an election year, the big question is: how on earth is Mr Chidambaram managing to show that he is fiscally responsible as well? Revenue balance by 2008-09 — in which tax revenues and expenditures are identical — has been postponed by another year. Considering the difficulties of cutting down on subsidies on food, fertilisers and oil and salaries of administration (with the Sixth Pay Commission looming ahead), eliminating the revenue deficit is a daunting challenge. So far, the government has been able to show lower deficits by keeping subsidies on oil and fertilisers, amounting to 1.2 per cent of GDP, off the Budget table as they do not entail any immediate cash outgo. If these are added to the Central fiscal deficit — another word for borrowings — the latter will be 4.3 per cent of GDP, not very different from that of earlier years. The fact that fiscal consolidation may be stalled is also reflected in the combined fiscal deficit of Centre and states being stuck at just over 7 per cent of GDP since 2004-05. Now, with an election season ahead and big-ticket spending commitments, Mr Chidambaram clearly hasn’t been able to stick to the straight and narrow FRBM path. A reasonable prospect is for the next government to address the consequences of all this fiscal profligacy in the future.