Budget 2001-02: Who Pays for Reform?

Mar 5th 2001

Over the last week television viewers have been subjected to judgments of Budget 2001-02 by a host of experts, who have declared it a dream budget, rating it anywhere between 7 and 10 on a scale of ten. In different ways all of them argue that Mr. Sinha has managed to spur growth while keeping the deficit under control. At first, these arguments are not easy to understand. A budget spurs growth by providing a fiscal stimulus. No such stimulus is provided by this budget. As Chart 1 shows, not only has the rise in the ratio of revenue expenditure (net of interest payments) to GDP since 1996-97 been reversed in this budget, but the absolute level of that ratio (8.0 per cent) was way below the level it stood at in 1989-90 (9.6 per cent). On the other hand, the ratio of capital expenditure to GDP, which fell from 5.9 per cent in 1989-90 to 3.1 per cent in 1996-97 and rose only marginally thereafter has slipped to around 2.5 per cent over the last two years and is slated to stay there in the coming year's budget as well.
Chart 1 >>
This failure is provide any fiscal stimulus is surprising since, on the eve of Budget 2001, India's economy offered the government an unprecedented opportunity to stimulate growth. That opportunity stemed from two sources. First, the accumulation of huge stocks of foodgrains, estimated at 45 million tonnes, with the government. Second, the comfortable foreign exchange reserves position of the central bank, with its foreign currency assets alone amounting to $41 billion.
When foodstocks are aplenty and foreign reserves comfortable, the manoeuverability of the government is substantial. It can undertake expenditures without the perennial fear that plagued it in the past that such expenditures, by raising employment, incomes and the demand for food, could create a food shortage that triggers an inflationary spiral. And even if the economy, in the wake of such expenditure, runs into temporary supply bottlenecks in particular sectors (such as say, sugar, edible oils or onions), the available foreign exchange reserves can be used to resort to imports to ease supply and dampen price increases. The danger that expenditure increases on the part of the government would trigger inflation hardly exists.
This ability to increase expenditure without triggering inflation constituted an opportunity because it occurs in a context where demand in the economy is sluggish and poverty remains high. India's GDP growth rate is estimated to have declined from 6.6 per cent in 1998-99 to 6.4 per cent in 1999-00 and 6 per cent in 2000-01. What is more even this rate of growth has been ensured because of the buoyancy of the services sector, whereas the commodity producing sectors have been performing quite poorly. Industrial growth placed at 8.2 per cent in1998-99 fell to 6.5 per cent in 1999-00 and is expected to be considerably lower this year. And there is little disagreement on the fact that the sluggishness in industrial growth is a result of slackening demand growth in the system.
Since a decade of reform has not triggered the promised consistent export boom, which would have served as an external stimulus to growth, domestic demand generation is a must for a revival of growth. In the current context, there is no other instrument that is likely to be more successful in stimulating increases in demand then higher government expenditure.
What is more, the availability of food stocks with the government can be used to ensure that a part of state expenditure could raise employment substantially, by being allocated to food-for-work programmes that build much-needed rural infrastructure. Higher employment in such programmes has and will impact positively on poverty. This is especially important because the incidence of poverty has remained stubbornly unresponsive to growth during the 1990s, as the available comparable estimates show. [See Abhijit Sen, Economic and Political Weekly December 16, 2000.]

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