Losing grip

“Under the FRBM Act, I am obliged to wipe out the revenue deficit by 2007-08. However, the NCMP has proposed that we do so by 2008-09. In my view, 2008-09 is a more credible terminal year; it will also coincide with the term of this Government…”

Terminal, indeed. when P. Chidambaram made this grand promise as Finance Minister in the UPA government’s first Budget in 2004-05, little did he know that his largesse in the closing years would leave the nation’s finances in a terminal state, with an unexpected global crisis only adding to the damage.

The interim Budget presented by Acting Finance Minister Pranab Mukherjee on February 16 turned out to be a let-down of sorts. Sure, an interim Budget cannot roll out big policy initiatives, but then it were ministers of the UPA government who had been talking of yet another stimulus package—stoking expectations of some “action” among businessmen battling with the global meltdown.

Mukherjee referred to the previous two stimulus packages already unveiled by the UPA and admitted that “... in the days of financial stress, tax rates must fall.” But he left it to a new government after the elections to take a call on further fiscal measures needed to boost the economy. Predictably, industry was disappointed. Says Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII): “We expected more from the Budget given the prevailing economic downturn.”

To be sure, the government’s recent efforts to stimulate the economy have already severely hit its finances. Fiscal deficit, a measure that tells if the government is spending within its means, was to come down to 2.5 per cent of GDP this fiscal, but will now widen to 6 per cent because of a fall in tax revenues—an outcome of the global financial meltdown and also the measures to boost the economy. The revenue deficit is forecast to increase to 4.4 per cent of GDP during 2008-09, against 1 per cent estimated in the Budget.

Obviously, there is not enough money left in the coffers to pump-prime the economy any further. But it would have helped if the government had given some account of how the money spent so far has been used. Many grand schemes, like the National Rural Employment Guarantee Plan, the Rs 60,000-crore farmer loan waiver and the rural roads scheme, are already working as a stimulus. It’s just that the government has not given any detailed account of the outcomes of these outlays.

1 Budget 2004-05 Mission statement: Outlining the priorities of the UPA government, the first Budget promised a “change in national priorities” with a thrust on social sector schemes. Key proposals included raising the FDI cap in telecom, civil aviation and insurance and introduction of a 2 per cent education cess. 2 Budget 2005-06   Tax reforms: A comprehensive set of tax reforms introduced. Personal and corporate income tax rates were reduced, peak rate of customs duty was cut and excise duty rates were reduced on several items. A new lot of fresh services were brought under the tax net. 3 & 4 Budget 2006-07 & 2007-08 Spending spree: Announcing the continuation of the “assault on poverty and unemployment” in 2006-07, these two Budgets offered lavish funding to various agriculture, infrastructure and social sector schemes. While that was laudable, absolutely nothing was done to ensure that outcomes matched outlays—something that Chidambaram had promised to ensure in the 2005-06 Budget speech. 5 Budget 2008-09 The mother of all stimulus packages: The cornerstone was the Rs 60,000-crore debt waiver for farmers, which was expected to benefit about 3 crore farmers. For the aam admi, there was the award of the 6th Pay Commission—these, combined with measures to combat the global meltdown, undid all fiscal correction.

The government did announce several boosts for infrastructure funding—the need of the hour—claiming that 50 infrastructure projects worth Rs 67,700 crore have been given in-principle or final approval in recent months. It said the India Infrastructure Finance Company will raise Rs 30,000 crore from market in the next financial year.

But there was no mention of what would drive the action on the ground. As Rajiv Kumar, Director & Chief Executive, ICRIER (Indian Council of Research in International Economic Relations), pointed out: “The government should have announced a time-bound plan for completion of infrastructure projects.”

Economists like Shubhada Rao of YES Bank say the government had few options. “The last year was very difficult and there’s little the government could have done to rein in the deficit. It’s broadly in line with expectations,” Rao says.

UPA’S five budgets Going by the proposals of the UPA’s five Budgets—minus the Interim one—it’s clear that the government’s reform zeal had started to wane after the second Budget.