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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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