Budget 2014-15: The Worst Yet to Come?

Surajit Mazumdar

While for obvious reasons many
have been chary of articulating it very sharply and clearly, even corporate
India and the neoliberal bandwagon appear a little surprised and disappointed
at this level of continuity between the UPA and the BJP regimes.

Table 1: Selected Budget Estimates for 2014-15 (Central
Government)

Item	Rs. Crores		As Percentage of GDP at Market Prices
	Interim Budget	Main Budget	Interim Budget	Main Budget
Revenue Receipts	1167131	1189763	9.1	9.2
Tax Revenue (net to centre)	986417	977258	7.7	7.6
Non-Tax Revenue	180714	212505	1.4	1.7
Total Expenditure	1763214	1794892	13.7	13.9
Non-Plan Expenditure	1207892	1219892	9.4	9.5
Plan Expenditure	555322	575000	4.3	4.5
Fiscal Deficit	528631	531177	4.1	4.1

So
how did the budget of a new government which was supposed to usher in big
changes become such a replica of a budget in which nothing ‘new’ could be
introduced by the outgoing government? What this reflects is firstly the
continuity of the thrust towards fiscal consolidation and retreat from the post
global crisis stimulus unleashed by the UPA II government. The hallmark of this
thrust over the last few years has been expenditure compression in the face of
sluggish revenues in order to curb the fiscal deficit. This aspect of the
continuity, easily explained by the common class character of the new and old
dispensations, is naturally not the one which troubles Indian big business and
foreign capital. They are instead disappointed at what appears to them as a
paradox – a right-wing government with a comfortable parliamentary majority and
five years away from facing the electorate being apparently unable to deliver
to them a more sumptuous feast than was managed by the UPA during the last few
years of its tenure. What they were expecting was the rolling out by Mr.
Jaitley of a great spread – of tax concessions, privatization, cuts in public
expenditure on heads like subsidies, agriculture, rural development and the
social sector and stepping up of infrastructure spending. Many of these are
there in the budget but ‘dil mange more’ and much more is the lament of big
business and of their neoliberal acolytes. The failure of the Finance Minister to
satisfy this constituency more fully is indicative of the fact that the policy
of fiscal consolidation under the present economic and political conditions may
have reached its limits and there is an extremely sharp contradiction the
government faces between delivering the ‘achhe din’ promised to the people during
the election campaign and that expected by those who bankrolled that campaign. The
question is – how will they deal with this contradiction?

The Continuity

Both
the limited scale of changes between the interim budget and the main budget and
the nature of those changes are symptomatic of the continuation of the economic
philosophy of the UPA government.

The
main budget has increased the total expenditure from the figure in the interim
budget but by less than two per cent. Even after this increase, the anticipated
expenditure to GDP ratio at 13.9 per cent would be amongst the lowest in recent
years and for the third successive year it would be less than the level in
2007-08, the year when the central fiscal deficit was at its lowest point (2.5
per cent of GDP). This is expenditure squeeze being pushed to extremes
particularly if it is kept in mind that the public expenditure to GDP ratio in
India is among the lowest in the world.

On
the revenue side, Mr. Jaitley gave direct tax concessions which would result in
some tax revenue loss. This has been partially compensated by shifting the tax revenue
burden a little more on to indirect taxes – leaving the total tax revenue
estimate less than one per cent lower than in the interim budget. The fiscal
deficit target of the interim budget has still been retained despite the tax
revenue loss and expenditure increase by relying on getting greater non-tax
revenue (through higher dividends from RBI, FM auction and increased user
charges for social services) and higher proceeds from disinvestment of
government equity in companies than were there in the interim budget.

In
other words, Mr. Jaitley while tinkering with the interim budget has clearly
gone by the neoliberal book – other decisions like hiking the FDI limit in
insurance and defence and diluting of the government stake in public sector
banks are also in line with that philosophy. He also declared that expenditure
‘management’, ‘rationalization’ of subsidies and further reduction in the
deficit is what lies ahead. So what is it that he did not or could not do?

The
problem with a policy of fiscal consolidation through expenditure control in a
time of economic slowdown is that it tends to be both self-reinforcing and self-limiting
in nature. Let alone addressing the fundamental constraints behind the
slowdown, compression of expenditure does not even allow infusion of a
short-term boost to demand in a sluggish economy. As a result it tends to
reinforce the slowdown and its adverse affects on revenue and this is
aggravated by a tendency to provide ‘tax relief’ on account of the slowdown. A
significant lowering of the tax-GDP ratio after 2007-08 is what India has
witnessed. If the fiscal deficit has to be controlled in such circumstances
then expenditure must also be reduced which results in the same cycle being
repeated. Eventually, however, this approach tends to hit a dead-end for
economic as well as political reasons – where the scope for cutting expenditures
tends to get exhausted which in turn limits the ability to give tax
concessions. It is this dead-end which is referred to as the ‘absence of fiscal
space’ which the Modi government is facing precisely because it is continuing
with the same policy. If it has to move significantly further down this path, and
it will inevitably be driven to that, it has to create the political conditions
which will allow it to make a quantum leap in the burdens that are imposed on
the people. A parliamentary majority resulting at least in part from the
discontent generated by the pursuit of that same objective by the UPA regime is
not sufficient for this purpose.

The
Expenditure Squeeze: Not Enough?

Those
who argue for further expenditure squeeze or diversion of expenditure to capital investment typically point
towards subsidies as the one area where big cuts were possible. The contention
is that under the UPA the expenditure under this head grew astronomically.
However, while it is true that 2008-09 witnessed a one-off hike in the
expenditure on subsidies since then there has hardly been any trend of the
subsidy bill burgeoning. The initial jump in 2008-09 was primarily on account
of fertilizer subsidies. In every year thereafter, the expenditure on
fertilizer subsidies has been in absolute
nominal terms less than in 2008-09 and Budget 2014-15 continues that trend.
As a percentage of GDP in fact, 2014-15 will be the third successive year in
which the expenditure on fertilizer subsidy will be lower than in 2007-08, that
is before the hike happened. If this did not bring down the subsidy bill, it
was because petroleum subsidies rose from 2019-10 till 2012-13. However, in the
last year (2013-14) and in Budget 2014-15 these too have been cut and as a
percentage of GDP are slated to fall sharply. Food subsidies have maintained a
steady share in GDP and what is remarkable in their case is that the enactment
of a Food Security Act does not seem to have made any significant difference to
the budgeted level of this expenditure. 

Table 2: Central Government Expenditure on Subsidies and
Selected Major Subsidies, 2007-08 to 20014-15

Year	In Rs. Crores				As Percentage of GDP at Market Prices
	Total Subsidies	Food	Fertillizer	Petroleum	Total Subsidies	Food	Fertillizer	Petroleum
2007-08	70926	31328	32490	2820	1.4	0.6	0.7	0.1
2008-09	129708	43751	76603	2852	2.3	0.8	1.4	0.1
2009-10	141351	58443	61264	14951	2.2	0.9	0.9	0.2
2010-11	173420	63844	62301	38371	2.2	0.8	0.8	0.5
2011-12	217941	72822	70013	68484	2.4	0.8	0.8	0.8
2012-13	257079	85000	65613	96880	2.5	0.8	0.6	1.0
2013-14 (RE)	255516	92000	67971	85480	2.3	0.8	0.6	0.8
2014-15 (BE)	260658	115000	72970	63427	2.0	0.9	0.6	0.5

To
put the subsidies picture in its proper perspective there are two additional
things which need to be noted:

The
first is that these expenditures have taken place in a context in which food
and fuel prices – both of which are affected by food, fertilizer and petroleum
subsidies – have been at the heart of the high inflation rates the Indian
people have suffered over the last seven to eight years. Moreover, with the
situation in West Asia and the very real prospects of a drought looming large,
2014-15 is likely to witness a greater build-up of these inflationary pressures
(It must also be kept in mind that the taxes earned by the Government from the
oil sector far outweigh petroleum subsidies). If anything, then, it is the
reluctance to increase expenditures on subsidies rather than profligacy which
should be the object of criticism. The idea that that these expenditures,
barely 2 per cent of GDP, are ‘too much for the nation to bear’ harks back to
the colonial times when India’s British rulers let millions die in famines.

The
second and very important point to remember is that fertilizer subsidies are
one item of expenditure related to the agricultural sector and the rural
economy (food and petroleum subsidies also have a bearing on the sector but
somewhat indirectly). If one sees the expenditure trend in it alongside that on
agriculture, rural development and irrigation, the results are startling. Even
when compared with 2007-08, the increase in nominal expenditure on agriculture
and rural development in 2013-14 was much lower than the increase in total
expenditure and this holds even if we were to add the fertilizer subsidy to
it.  If the comparison is instead made
with 2008-09, it becomes a story of contraction! Those who are crying for cuts
in fertilizer subsidies are in effect therefore demanding an even bigger squeeze
on the rural economy!

Table 3: Percentage Increase in Nominal Values of Revenue,
Expenditure and GDP

Item	Revised Estimates 2013-14 over Actuals of 2007-08	Revised Estimates 2013-14 over Actuals of 2008-09
Gross Tax Revenue	95.4	91.5
Centre’s Tax Revenue	90.2	88.6
TOTAL EXPENDITURE of Central Government	123.2	79.9
Agriculture+Rural Development+Irrigation (Plan and Non Plan)	76.1	2.3
Agriculture+Rural Development+Irrigation+Fertilizer Subsidy (Plan and Non Plan)	92.3	-5.4
GDP at Current Market Prices	127.7	101.7

          

Prospects

No
matter what the neoliberal bandwagon may try to project, the stark reality is
that excessive expenditure is not the source of the Government’s fiscal
problems. As Table 3 shows, on a point-to-point basis the increase in total
expenditure between 2007-08 and 2013-14 was less than that in nominal GDP –
agriculture and rural development being the biggest casualty (social services
and food subsidies too have been adversely affected). The real problem has been
that revenue growth has been even more laggard. In such circumstances, the room
for further squeeze on expenditure and for tax concessions must remain limited
unless the Government is willing to administer a very very bitter pill to the
already suffering common and working people of the country. The compulsion to
administer such a pill may arrive very soon.

For
one, Mr. Jaitley has retained the somewhat optimistic revenue estimates of the
previous Finance Minister.  For the last
two years actual revenues have fallen short of estimates which in turn have resulted
in expenditures being less than originally budgeted.  The Modi government might be driven to do the
same if it wants to stick to the fiscal deficit target.

On
the other side, no provisions have been made in the budget to deal with the
very real possibilities of increase in oil prices and drought. Even NREGA
expenditure in nominal terms has been pegged at the same level as last year
which was a relatively good year for agriculture (in real terms this means a
contraction) and below the actual expenditure in 2010-11. Unless it is
exceptionally lucky, therefore, the Modi government will have to let people
suffer extreme distress if it insists on sticking to the expenditure targets
laid out in the budget. Even if these immediate possibilities are somehow
averted, reducing the fiscal deficit over the next couple of years will still
involve a bitter pill. Whether the Government will succeed in these efforts to
push fiscal consolidation and please its corporate backers or not remains to be
seen. What is clear is that they will not be ultimately deterred unless they
are defeated in the struggle that this context inevitably involves – a struggle
in which the array of instruments in the Sangh Parivar’s arsenal will be
deployed to create ‘conducive’ political conditions!

The author is Professor at
the Jawaharlal Nehru University, New Delhi.