It is only fair that any analysis of a Budget must be rooted to the state of the economy. That would, in more ways than one, provide an overall context to its textual contents. Most economists and analysts are unanimous of their view (especially after the clear mandate to the NDA in the recently concluded elections) that the decade of UPA rule was indeed a disaster on several fronts, notably, on managing the national economy. It was therefore remarked in the run up the Budget 2014 that the incumbent finance minister (FM) has as much fiscal elbow room as Christ had on the cross.
Simultaneously, one is also stunned by the obsession of the nation to the Union Budget. More to the point, after a “scorched earth policy” of the UPA Government that would shame the Ghoris and Ghaznis, it is indeed surprising that we the people of this country have “expectations” from anything, much less, the Union Budget.
It is in this context that the Economic Survey for 2013-14 remarks: “Indian economy has been going through challenging times that culminated in lower than 5 per cent growth of GDP.” Elaborating on this theme it adds, “Sub-5 per cent GDP growth for two years in succession was last witnessed a quarter of a century ago in 1986-87 and 1987-88” (Para 1.2, Economic Survey). Surely, it takes special talent to equal a three decade record!
Now let us briefly look into how all these translate into fiscal numbers epitomising the compulsions of the FM while preparing this year’s Budget. Interest – Rs 4.27 Lac crores, Defence - Rs 2.29 Lac crores, subsidies (including food, petroleum and fertiliser) Rs 2.50 Lac crores, Pensions - Rs 0.81 Lac crores, Police Rs 0.47 Lac crores, grants to state government – Rs 0.69 Lac crores, defence equipment purchases – Rs 0.95 Lac crores, sundry non-Plan expenditure – 0.93 Lac crores aggregate to Rs 12.92 Lac crores.
On a Budget of about Rs 18 Lacs crores, it can be seen that the FM has been already committed, thanks to the faulty economic policies of the previous regime, approximately three fourths of the entire Budget amount on these few heads. On top of this the establishment expenses – read salaries and wages – aggregate to Rs 1.4 Lac crores, leaving hardly any fiscal headroom for any new initiatives, plans or programs.
Put pithily, the UPA has not only ruined the Indian economy but has also left behind a legacy of recklessness that would be very difficult to overcome. And this precisely is the challenge for the NDA government.
But let me hasten to add that this cannot be an excuse for eternity. Mandate 2014 was not only for regime change but also reflected the nation’s cravings for “structural change”. Consequently, an incremental approach does not excite anyone anymore. However, one must be also be a realist. The FM cannot dismantle the existing fiscal structure overnight. Be that as it may, it is indeed baffling that the Budget has not attempted a beginning by laying bare the real fiscal health of our economy. Let me amplify.
It may be recalled that the outgoing UPA government had projected a fiscal deficit of 4.6% of the GDP for 2013-14 while presenting the interim Budget in February this year. Analysts meanwhile, in the context of a tepid GDP growth, spiralling government expenditure and falling revenues, anticipated a much larger fiscal deficit. It was apparent that the then FM had fudged macro-economic numbers and passed of good English as good economics.
For instance, the gross under recovery - read subsidy - on account of Diesel, Kerosene and domestic LPG for 2013-14 aggregates to Rs 1.61 Lac crores (Source: Ministry of Planning and Analysis Cell – Petroleum Prices and Under-recoveries). As against this, Budget 2014 holds the petroleum subsidy at mere Rs 0.85 lac crores – more or less the very same number the outgoing Government had projected in February. Obviously the Government has to pay for this difference (and indifference) someday in future.
Crucially, this difference between the under recovery in the hands of the oil Marketing Companies and actual subsidy recorded in Budget translates to approximately 0.7% of the GDP. To this extent the expenditure and fiscal deficit for 2013-14 is understated. Consequently, having used a wrong bench mark of 2013-14, the fiscal deficit for 2014-15 projected by the FM too is understated. And to that extent Budget 2014 begins on a wrong note, makes wrong assumptions and in the process makes a mess of itself.
And if you thought that this was the only head in which fiscal deficit was understated for 2013-14, you could be wrong. In an incisive article titled “How to handle UPA’s Financial Landmines” (The New Indian Express, July 6, 2014) noted chartered accountant S Gurumurthy points out that the outgoing UPA Government had forced banks to deposit approximately Rs 20,000 crores of TDS prior to 31.03.2014. Usually this money is accounted as revenues for the next year viz., 2014-15.
Thus, by artificially boosting revenues for 2013-14 (and simultaneously under-reporting on expenditure) the outgoing FM had successfully fudged the fiscal deficit for 2013-14 in his revised Budget estimates for 2013-14, but at a tremendous cost to Budget 2014-15. One can definitely understand the compulsion of the previous regime in indulging in such skulduggery. After all, for a decade we were used to such duplicitous accounting.
But one fails to understand why Budget 2014 did not come out with this fundamental fact. What were the compulsions of the FM in suppressing fiscal deficit of 2013-14 and thereby the truth? Or did the bureaucracy, having been party to the gross mismanagement of the economy by the UPA, pull a fast one on the FM, especially given the fact that he was constrained for time?
Approach of yesteryears
That is not all. The FM promises tax stability on one hand and introduces approximately 70-odd amendments to the Income-Tax Act! One may recall that this legislation is of 1961 vintage and has, according to experts, undergone in excess of 10,000 amendments. Yet to this date the Act has not found its final destination place even as it is planned to be replaced by a new legislation. This repeated amendment to the Tax Laws even on settled matters (and some to overturn the decisions of Higher Courts, at times retrospectively) was rightly termed as “tax terrorism” by the BJP in the run up to the elections. Strangely, having come to power, the party precisely indulges in tax terrorism that it frowned upon when it was in opposition!
What is adding fat to the fire is that the FM has gambled excessively on growth while projecting revenue inflows for 2014-15. It be noted that a recent study by the Reserve Bank of India on the performance of 2790 Non-Government Non-Financial Companies for the quarter ending 31st March 2014, indicates a precipitous fall in the their top line as well as bottom line. In fact, the earnings before interest were a mere 11.8 per cent, indicating that these corporates did not earn enough to pay interest, not to mention their ability to repay their borrowings. Yet the Budget anticipates extraordinary jump in tax revenues. This is bound to let tax administrators milk existing tax payers that much harder.
Thanks to the policy paralysis of the previous regime, Iron and Steel, Mining, Power, Civil Aviation and Textiles are some sectors which are facing unprecedented financial crisis. These sectors are in dire need of State intervention. And if the crisis is allowed to fester for a year or so, this could develop into a banking crisis as most in these sectors have heavily borrowed from banks. Surely, India can do well without a full-fledged financial crisis triggered by a banking crisis. Strangely the Budget was silent on this issue.
Likewise on Black money, the Budget is inexplicably silent, considering the fact that this issue dominated the general elections. By promising to revive SEZs (when they are achieving CAGR in excess of 20%) the FM obviously misplaced his priorities. It may not be out of place to mention that the SEZs have become perfect vehicles for Money Laundering.
On unemployment (as also inflation) the Budget is once again silent. Let us also not forget that the Manufacturing sector will have to be the engine of growth for the next decade or so. The growth rate for this sector in 2012-13 was 1% and 2013-14 was less than 0.5%. If this has to reversed, massive reforms have to be undertaken which include improving infrastructure, labour laws and of course taxation laws. On all these counts the FM has been eloquently silent or has proffered vague promises or has set up committees to look into the matter. Either way, these issues have not got the attention they deserve.
However the FM deserves praise for promising to look into MSME funding, malnutrition and setting up a Rs 10,000 crore venture capital fund.
The long and short of the arguments made thus far are that Budget 2014-15 is a holding-on exercise; an elaborate charade in continuity. By continuing to allocate money for MNREGA and Aadhaar-UID program it would seem for a visitor from Mars that the ghosts of UPA are well and truly entrenched in North Block. Unless this is addressed pronto, the NDA Government runs the risk of betraying the mandate of 2014 general elections.