With third quarter GDP estimated to have grown by 6.1 per cent, it is doubtful whether the economy will post a growth of 6.9 per cent in 2011-12, as projected in the advance estimates put out by the Central Statistical Organisation.
The slowdown in growth in Q1, Q2 and Q3 to 7.9 per cent, 6.9 per cent and 6.1 per cent, respectively, put paid to the projections of 9 per cent growth made in the last Budget. The RBI, in its third quarter review of monetary policy on January 25, lowered the growth projections for 2011-12 to 7 per cent.
The RBI's projection of 8.75 per cent, made in May 2011, has also become redundant. The same can be said of the PMEAC forecast of 8.2 per cent made in August.
While the growth slowdown in 2008-09 was an offshoot of the global financial crisis, which impacted India through the trade, finance and confidence channels, the reasons for the slowdown in 2011-12 are perhaps not as easily identifiable, except for the European sovereign debt crisis. The monsoons, for instance, were normal. What, then, led to the steep decline in growth from 8.4 per cent in 2010-11?
Expansionary Policy
It would be interesting to observe the complexion of growth after the crisis year of 2008-09. The growth of 8 per cent in 2009-10 and 8.4 per cent in 2010-11 was achieved by pursing a combination of easy monetary and expansionary fiscal policy. Although growth of above 8 per cent could be sustained, it was with the help of steroids of expansionary policy.
The undesirable consequences of misdirected policy were manifested in high and persistent levels of inflation at one end, and ballooning of fiscal deficit on the other. Fiscal deficit, which was on a correction path till 2007-08, shot up to 6 per cent in 2008-09, 6.4 per cent in 2009-10 and 5.1 per cent in 2010-11(RE) and is projected at 4.6 per cent in 2011-12(BE).
In 2010-11, the Finance Minister could rein in the fiscal deficit indicators to a level lower than budgeted (5.5 per cent) because of both numerator and denominator effects. The numerator was higher because of one-off revenue from the auction of 3G spectrum. On the denominator side, high levels of inflation led to a very high nominal GDP growth — more than what we would have got with inflation levels of 6 per cent.
With government exhausting 92 per cent of the budgeted fiscal deficit in the first nine months of 2010-11, it is now a given that government will overshoot its deficit indicators.
Capital Expenditure Down
Monetary policy has been fighting hard to bring down inflation by pursuing a tightening stance beginning in late 2009-10 and continuing throughout in 2010-11 and also to a larger part of 2011-12. On the other hand, fiscal policy continued to be in the expansionary mode as the total expenditure of the Central government increased by 18.7 per cent in 2010-11 on the back of a 15.9 per cent growth in 2009-10 and was estimated to grow by 3.4 per cent in 2011-12. Thus, while 2010-11 was a year of monetary rectitude, it was a year of careless fiscal expansion.
The RBI Governor pointed at the unbridled fiscal expansion while expressing his helplessness in controlling the inflation. Given the deteriorating fiscal situation, what are the fiscal policy priorities?
The first and foremost is to contain fiscal and revenue deficit to budgeted levels. It is also important that the Finance Minister projects more realistic growth and deficit numbers for 2012-13 to gain credibility.
When the government lacks control over populist spending and needs to control deficits, something must give in, and that something has been capital expenditure. For instance, the share of capital spending in total expenditure has declined from 13.5 per cent in 2010-11(RE) to 12.8 per cent in 2011-12(BE). The need to reverse the decline in the share of capital expenditure is another priority.
Alignment of Priorities
In the larger context, it is equally important to revisit the approach towards Budget making. Beginning with the Eighth Plan (1992-1997), India has adopted indicative planning, moving away from centralised planning. Under indicative planning, government sets out a long-term strategic vision. In the indicative planning paradigm, government identifies sunrise and sunset sectors of the economy and alters the incentive structure accordingly. The Budget, as an annual exercise, should align itself with the Plan priorities while allocating resources to different sectors and ministries. This would require consistency in approach.
However, this does not seem to be the practice at present. For instance, the Government attaches a lot of importance to encouraging renewable energy. However, the allocation of capital expenditure for the Ministry of New and Renewable Energy Resources in the Budget was 0.28 per cent in 2008-09, which moved up to 0.43 per cent in 2009-10 and 0.50 per cent in the revised estimates of 2011-12, but fell to 0.36 per cent in the Budget estimate for 2011-12.
A similar pattern is observed in case of Agriculture, Rural Development and Urban Development. There is a lack of consistency in increasing the Budget allocation, in tune with priorities set out by the Government in its Approach Paper to the Twelfth Plan.
This year's Budget may make a sincere attempt to integrate short-term planning with the long-term vision that the government holds for the economy.
The author teaches Economics at the Xavier Institute of Management, Bhubaneswar. The views are personal.