Finance Minister Yashwant Sinha is on the defensive. His Budget has disappointed almost all segments of economic opinion, though of course for diverse and even conflicting reasons. Further, the stock markets, which he himself has made an important indicator of policy correctness, have responded negatively. This has left him in a situation where he is unclear in which direction to turn. If all sections are to be accommodated, he would denude this year's Budget of even the little new content it has. This is because the five measures he considers to be the significant advances made in this Budget, namely, the cuts in food and fertilizer subsidies, the reduction in interest rates on small savings, the "rationalisation" of excise duties through the introduction of the Central value added tax (Cenvat), the liberalisation of imports and the tax on 20 per cent of export profits, would have to be fully or partially withdrawn.
 
In particular, any "rollback" of the subsidy cut, under pressure from the allies of the Bharatiya Janata Party in the National Democratic Alliance (NDA), would amount to reversing the only measure in keeping with the promise made in the Economic Survey to take harsh decisions to curb government expenditures. This unenviable situation is partly Yashwant Sinha's own making. Trapped in a fiscal bind generated by years of financial reform, he has chosen to persist with and advance the reform rather than seek to reverse it and extricate himself from a hopeless situation.
 
In keeping with this strategy, in the run-up to Budget, the Government - through its spokesmen and the Economic Survey - had made it clear that the reduction of expenditure and of the fiscal deficit is the fiscal task of the moment. Despite this, the Budget could not proceed too far in this direction. Total expenditure of the Central Government, which had risen from Rs. 279,366 crores in 1998-99 to Rs. 303,738 crores in 1999-2000, is slated to rise further to Rs. 338,436 crores in t he next financial year. The projected 11.4 per cent rise, which is higher than the 8.7 per cent rise of the previous year, has been seen as a failure to ensure an adequate degree of fiscal correction.
 
This has constituted the principal ground for criticism of the Budget by many industry and academic experts. This approach is based on two presumptions. First, that a reduction of the fiscal deficit as part of a strategy of financial reform is the main task facing the Government. And second, that the failure of the Government to execute that task is the result of "excess" expenditure. It hardly bears stating that in a context in which growth in the commodity-producing sectors has been sluggish and in which there has been virtually no progress on the poverty reduction front during the 1990s, the Budget must above all be seen as a means to trigger growth and alleviate poverty.
 
The obsession with the fiscal deficit and expenditure reduction amounts to downplaying these more fundamental objectives. In fact, the objectives of growth and poverty reduction call for more expenditure rather than less, even if it involves a larger fiscal deficit. And, given the large stocks of foodgrains with the Government and the comfortable level of foreign exchange reserves, it is more than likely that such deficits would result in higher levels of output rather than in inflation. The fact that the increase in expenditure resulting from the implementation of the Fifth Pay Commission's recommendations has been accompanied by unusually low rates of inflation is one indicator of this. And higher GDP growth in turn would mean lower fiscal deficit to GDP ratios.
 
At first sight it appears that the Finance Minister can take credit for having increased expenditures during his tenure, his public rhetoric notwithstanding. The expenditure to GDP ratio, which fell from 19.2 per cent to 14.8 per cent between 1989-90 and 1997-98, has in fact risen over the last two years, and is expected to touch 15.8 per cent in 1999-2000. However, a closer look at the components of the Government's expenditure suggests that this reversal has occurred not because of, but despite, the Finance Ministry's efforts to the contrary. For example, right through the reform years, the ratio of the government's capital expenditures to GDP has almost consistently fallen, from a high of 5.9 per cent in 1989-90 to a dismal 2.6 per cent during the current financial year. On the other hand, the ratio of revenue expenditure to GDP, after having fallen from 13.3 per cent to 11.7 per cent in 1996-97, has risen sharply thereafter to touch 13.1 per cent in 1999-2000, which is close to its 1989-90 level.
 
But even here the increase is in large part on account of larger outlays on interest payments. Until 1996-97, interest payments were continuously rising as a share of GDP, whereas the rest of revenue expenditure was on the decline. It is only after that, with the "unavoidable" implementation of the Pay Commission's recommendations, that the rise in interest payments has been accompanied by a rise in revenue expenditure net of interest. Thus the only expansionary impulse provided from the fiscal side is a result of the Pay Commission's recommenda tions, which, together with the good harvest of 1998-99, has contributed to the modest recovery in industrial growth in recent months in the midst of extremely low inflation.
 
Two lessons can be drawn from that experience. First, the expansionary stimulus from the state has to be sustained if the recovery is to continue. And, second, a conscious effort must be made to reduce the share of interest payments in the "expenditure" of the government. An expansionary stimulus, in the form of more public expenditure, can be financed in two ways: greater resource mobilisation through taxation and a higher fiscal deficit. The strategy of economic liberalisation, however, militates against the first option. Not only are customs duties being reduced consistently as part of import liberalisation, but a range of direct and indirect tax concessions have been provided over time, resulting in a fall in the net tax-GDP ratio at the Centre from 7.9 per cent in 1989-90 to 5.9 per cent in 1998-99. The rise in oil prices and the slight economic buoyancy referred to earlier have helped raise this figure to 6.5 per cent in 1999-2000.
 
The feeble effort made in the Budget to sustain this trend by raising the surcharge on income tax and bringing export incomes into the tax net has, as expected, been received adversely by those who see it as an unnecessary intrusion of the state into private activity. The net result of the trends in taxation and expenditure has been that the fiscal deficit at the Centre has proved stubbornly resistant to reduction, rising from 4.9 per cent in 1996-97 to 7.0 per cent in 1999-2000. (These figures differ from those quoted by the Government in the Budget papers, since these are based on the older definition of the fiscal deficit which includes all the small savings accruing to the government, a part of which is transferred to the States.)