Indian Express, 5th March 2013
How a Congress-friendly budget also addresses the markets
Initial reactions to the Union budget, 2013-14, were based on an analysis of numbers as Finance Minister P. Chidambaram chose to represent them in his budget speech. The budget was seen as a tax and spend document - expenditure on the Congress's pet projects was increased, to be financed by higher taxes on the super rich. The budget was mostly in line with the Congress's politics of the last ten years. It was pro-rural poor and anti-rich.
The disappointment that followed was mainly due to expectations from Chidambaram, who was seen as more market-friendly than the rest of his party but had failed to present a budget that pushed investment and helped growth, or to defy the party line. Arguably, the budget was not more market friendly than that which could have been presented by any other Congress minister.
There seem to be two issues here. First, shouldn't it have been expected that the last budget before the elections would be one that represented Congress ideology? In the last ten years, the Congress has not portrayed itself as pro-business or even pro-market. It is only when the economy started slipping into a bottomless hole that the party brought in its most competent and most market-friendly cabinet minister to take charge. Chidambaram's job was to convey to the markets that it was not a complete return to the days of the licence-permit raj. But to expect that the Congress was ready to give up its agenda of welfare programmes, or the pro-poor, anti-rich image it has been trying to build, was perhaps unrealistic.
As a consequence, the budget essentially had to be a tight-rope walk between the instincts of the Congress and the needs of a government rapidly losing the confidence of industry, foreign investors and credit-rating agencies.
The second issue concerns the message of the budget speech. The reaction to the speech was perhaps what the finance minister calculated it would be. The budget would be seen as pro-rural poor and anti-rich. After all, in his speech, the minister chose to interpret his budget numbers as he liked. The speech was more Congress-friendly than market-friendly. But the same budget may have been used to convey a very different message - one of moving towards a smaller government and restricted spending on welfare schemes.
For example, in his Congress-friendly speech in Parliament, Chidambaram said: "I have been able to set the budget estimates of total expenditure at Rs 16,65,297 crore and of plan expenditure at Rs 5,55,322 crore."
A market-friendly version of the same numbers would have read: "I propose to allocate Rs 16,65,297 crore for total expenditure, thus raising expenditure by 11 per cent over last year's budget estimates. Since I expect the GDP to grow by 13.5 per cent in nominal terms, this means reducing the size of the government in the total GDP."
Similarly, Chidambaram said: "Hon'ble Members will be happy to know that plan expenditure in 2013-14 will be 29.4 per cent more than the revised estimate of the current year."
A market friendly version of the budget numbers might have read: "Plan expenditure in 2012-13 was budgeted to be Rs 65,000 crore. Owing to the difficult fiscal situation, I propose to allocate only an additional Rs 3,000 crore, or Rs 68,000 crore for planned expenditure in 2013-14. This will mean that the amount budgeted for plan expenditure will shrink in real terms."
Further, in his Congress friendly speech, the finance minister said: "The ministry of rural development steers a number of flagship programmes. We estimate that they will be able to spend Rs 55,000 crore before the end of the current year, and I propose to allocate Rs 80,194 crore in 2013-14, marking an increase of 46 per cent. MGNREGS will get Rs 33,000 crore."
A market friendly version of the same speech might have read: "Last year the ministry of rural development got a budget allocation of Rs 76,000 crore. This year I propose to allocate Rs 80,194 crore, a contraction in real terms. Expenditure on MGNREGS was budgeted to be Rs 33,000 crore in 2012-13. I do not propose to raise the allocation for MGNREGS in 2013-14. This implies almost a 10 per cent reduction in the allocation for MGNREGS in real terms."
This is not to say that the Congress is actually moving towards a smaller size of government. If there has been a contraction compared to what was proposed last year, there has been little change in the long-run growth path of government spending, at roughly 15 per cent.
Similarly, the tax on the super rich might yield less returns in terms of economics and more in terms of politics. The finance minister clearly ignored the advice of the chief economic advisor, who said, "higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion". Higher taxes on luxury goods, a surcharge on corporate income tax and dividend distribution may raise tax revenue in 2013-14, but it is unlikely to facilitate a good tax policy for the country in the long run. That can only come with a simpler tax code, fewer exemptions, increased compliance through a GST and lower taxes discouraging evasion. The increase in non-tax revenue based on spectrum sale and disinvestment may be able to finance the budgeted expenditure next year while keeping the fiscal deficit down, but it will not lay the ground for sustainable fiscal consolidation. The tight-rope walk of a finance minister trying to marry Congress ideology with the need for growth and investment in the economy cannot be a long-term strategy.