Union Budget 2013-14: Caught Between Various
Contradictions
Arun Kumar.
Sukhamoy Chakravarty Chair Professor, CESP, SSS, JNU
Mainstream. March 2, 2013. Vol LI No 11.
The Union Budget is the largest
single economic event of the year for the nation. It sets the direction for the
economy for the coming year. Hence it is keenly watched by the public. The
Union Budget for 2013-14 projects an expenditure of 14.6% of the GDP for that
year, i.e., Rs.16,65,297 crore. This is a huge sum of money and as usual the FM
doles it out in dribs and drabs to every politically important section of the
nation. In the part A of his speech which presents the government’s intentions,
he mentions almost all these sections – SC, ST, minorities, women, youth and so
on. The impression created is that it takes care of everyone. But the real
question is, what does it do for the economy as a whole and whether it tackles
the major problems that the economy currently faces?
The Finance Minister at the outset
identifies the problem facing the economy – the difficult macroeconomic
situation. Three aspects are mentioned. First, the economy is rapidly slowing
down with the rate of growth falling quarter by quarter in the last more than a
year. Secondly, the rate of inflation remains at a high level in spite of all
the attempts by the government and the Reserve Bank. This high rate is
persisting over the last three years, especially in food items, in spite of the
high foodgrain reserves. Finally, the Current Account Deficit in the external
account of the nation is dangerously high.
In addition to this, there were
two mutually contradictory constraints on the budget. First, this is possibly
the last budget before the next general elections and the party expected it to have
a strongly pro-poor image to garner votes in a very bleak political scenario given
its severely tarnished image due to scams and mismanagement of the economy.
Secondly, the international agencies are watching hawk like the performance of the
Indian economy from the point of view of the business climate and especially
for international finance capital. They want the government to adopt a
conservative political stance. The international credit rating agencies have
been threatening to lower the rating of the economy because India ’s foreign
debt ($ 365 billion in September 2012) has been mounting rapidly given the
current account deficit. If that were to happen, then in spite of the current
high foreign exchange reserves ($295 billion in January 2013) of the country,
capital may begin to flow out and lead to a sharp devaluation of the currency
with consequent problems. There has been a rapid slow down in flow of FII and
FDI into India .
Thus, the room for maneuver for
the Finance Minister to give big ticket concessions to a lot of people (as in
the 2008 budget) was limited. Yet, it can be termed as an election year budget
given that it has not taken the tough steps required to put the economy back on
the rails so that it could grow faster. For India a 5% rate of growth is
inadequate in the present development scenario since that results in rising
unemployment – a consequence of a high capital intensive development. The
concession to elections is that the budget projects many small give aways to
many sections of the population without giving away any major amounts to any
one which would have dented the macro economic scenario and produced a reaction
from the international institution.
Another concession to the
international institutions is that the expansionary policies needed to step up
growth have been held in abeyance and instead supply side response is sought to
be generated via concessions to the corporates and the stock markets. That is
why expenditures were severely curtailed in the present year (2012-13) and are
sought to be kept in check in the year 2013-14. The attempt is to not increase
direct tax collections rapidly and curtail the fiscal deficit but to cut back
on expenditures given that the revenues have fallen short with a slowing
economy.
In 2012-13, an optimistic nominal
rate of growth of the economy (14%) was projected. At that time also the
experts had pointed out that a 7.5% rate of real growth was unrealistic but the
government was adamant that this rate of growth would be achieved. Now it is
clear that the year is ending with a less than 5% rate of growth. What is also
clear is that all the agencies predicting the economy’s rate of growth – IMF,
RBI, ADB, World Bank, private agencies, etc. - have proved to be wrong. The
consequence of this incorrect assumption is clear. Revenues have been less than
projected by 7.3%. The government is again doing the same by projecting a rate
of growth of 13.4% while this is nowhere in sight unless the rate of inflation
rises sharply but that will have other adverse consequences and targets will
not be met.
Again due to wrong assumptions,
the expenditures in 2012-13 have turned out to be more than projected. The
government is forced to show higher expenditures to dress up its image. For
instance, 2012-13 is the first year of the 12th Plan and the
government wanted to show that it is serious so it projected an increase of 16.8%
in the Central Plan outlay over the revised estimates of the previous year. But from the figures now available it is clear
that in 2011-12 it ended up spending (Rs.5,08,596 crore), much less than the
revised estimates of that year (Rs.5,58,172 crore). Further the revised
estimates of 2012-13 are Rs.5,56,176 crore which is less than the revised
estimate of the preceding year. Thus, comparison of revised estimates shows
that in 2012-13, there is a decline rather than an increase in plan spending. The
actual figure is likely to be even less given the previous year’s experience. Such
jugglery with figures seems to be the hallmark of successful Finance Ministers.
A consequence of this kind of
creative playing with figures is that the government projects a higher
allocation in the Plan for the important ministries like, Agriculture, Rural
development, Irrigation and flood control and Tribal Affairs but ends up
spending much less. In each of these cases, the revised estimates of
expenditures (in 2012-13) are less than the actual spent in 2011-12. There is
an absolute decline and not an increase. For other important ministries like,
Ministry of Human Resource Development, Ministry of Housing and Urban Poverty
Alleviation, Ministry of Women and Child Development and Ministry of Health and
Family Welfare the increase in Revised estimates for 2012-13 over the actual of
the 2011-12 is hardly enough to compensate for inflation and as such there is
little increase in expenditures for these necessities of the common man in real
terms.
In his budget speech the Finance
Minister now claims that he is increasing allocation to each of these
Ministries by substantial amounts (to garner brownie points from the public for
the coming elections). What he is showing is that over the much lower revised
figures of expenditures in 2012-13 he will increase the allocations
substantially in the coming year 2013-14. This is the usual jugglery adopted in
the recent past and that is why the budgetary arithmetic turns out to be
incorrect.
One of the unintended consequences
of all this is that when the revenues of the Centre fall short then the
transfers to the states also becomes less since they get 32% of the Central tax
collections. The reduction in 2012-13 is Rs.32,000 crore. This makes the
position of the states difficult and they also cut back from key social sector
expenditures. Since they are the major spenders on the social sectors this
worsens the position of the marginalized sections who depend more on the state
expenditures. No wonder, we are unable to achieve the target of 6% of
expenditures on education and so on. The Financé Minister has also promised to
revamp the transfers to the states by changing the criterion and some backward
states CMs seem to be happy with this. But unless the pie increases there may
be only internal redistribution with some states losing out to others.
The Finance Minister has increased
the tax on those earning more than Rs.1 crore per annum (42,800 in number) by
3% by imposing a surcharge of 10% on the tax they pay. This would garner along
with other items of increased tax on luxuries about Rs.14,000 crore. But, this
section benefits the most from the budget since the tax expenditures (taxes
that should have been collected but are not, due to concessions) will rise by
Rs.40,000 crore. Thus, the earlier statement by the Finance Minister that the
super rich should pay more taxes comes to naught. There is also no increase in
either the wealth tax or the estate duty.
To increase the revenue it was
important to tackle the black economy and get additional resources but the Finance
Minister has done little on this in spite of having received the reports from
the three institutes that were charged with the task of analyzing the black
economy. The postponement of implementation of GAAR to 2016 is a sop to the
corporates and foreign entities. The changes in the secrecy provisions of funds
routed through Mauritius
and other tax havens were diluted immediately after announcement in the budget
because of the reaction in the stock market. All this makes clear that the
government is not serious about tackling the black economy. But this one step is
the key to tackling inflation, improving governance, increasing the growth rate
of the economy and checking the outflow of funds causing the BOP crisis at
present.
In brief, the Finance Minister has
missed the chance to correct the macro economic imbalance that afflicts the economy
according to his own analysis. It is clear that there is much confusion in the
Union Budget 2013-14 which has fallen between several stools and will not be
able to give a clear direction to the economy apart from not disturbing the
corporates and the foreign investors. The Aam Admi, in whose name the Congress
(I) asked for vote, is once again marginalized.
arunkumar1000@hotmail.com
