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Finance Minister
Yashwant Sinha is on the defensive. The all-round criticism of his budget,
even if for diverse reasons, and the negative response of the stock
markets, which he himself has made an important indicator of policy
correctness, have left him wondering in which direction to turn. If all
sections, including the BJP's allies, are to be accomodated, he would
denude this year's budget of even the little new content it has. This is
because the four measures he considers to be the significant advances made
in this budget, viz., the cut in food and fertiliser subsidies, the
reduction in interest rates on small savings, the 'rationalisation' of
excise duties through the introduction of the CENVAT tax and the tax on a
20 per cent of export profits, would have to be withdrawn. In particular,
any 'roll-back' of the subsidy cut would amount to reversing the only
measure in keeping with the promise made in the economic survey to take
harsh decision to curb government expenditures.
This unenviable situation is in part of Mr. Sinha's own making. Trapped in
a fiscal bind generated by years of financial reform, he has chosen to
persist with the reform strategy rather than seeking to reverse it and
extricate himself from a hopeless situation. In the run up to Budget, the
government - through its spokesmen and in the text of the Economic Survey
- had made the reduction of expenditure and of the fiscal deficit 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 crore in 1998-99 to Rs. 303,738 crore in
1999-2000 is slated to rise further to Rs. 338,436 crore in the next
financial year. This 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 basis of 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 where growth in the commodity producing sectors
has been sluggish and where there has been virtually no progress on the
poverty reduction front during the 1999s, the budget must above all be
seen as 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 foodgrain 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 huge increase in expenditure as a result of
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.
Seen in this light medium term trends in the finances of the government
appear to be positive. The expenditure to GDP ratio, which fell from 19.2
to 14.8 per cent between 1989-90 and 1997-98, has in fact risen over the
last three years to touch 15.8 per cent in 1999-2000. Thus, Mr. Sinha can
claim credit for having reversed the decline that characterised the early
years of reform.
However, a closer look at the components of the government's expenditure
suggest that this reversal has occurred not because of but despite the
Finance Ministry's efforts to the contrary. Right through the reform
years, the ratio of the government's capital expenditures to GDP has
almost consistently fallen, with the performance in 1999-2000 being
particularly dismal. As Chart 1 shows, right through the reform years, the
ratio of the government's capital expenditures to GDP has almost
consistently fallen, with the performance in 1999-2000 being particularly
dismal. As a result from a high of 5.9 per cent of GDP in 1989-90, the
ratio has fallen to as low as 2.6 per cent during the current financial
year.
Chart 1 >>
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 what is interesting to note are the rather diverse
trends in outlays on "interest payments" and revenue expenditures net of
interest payments.
Till 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. The only
expansionary impulse provided from the fiscal side is the result of the
Pay Commission 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. |
