The macroeconomic backdrop in which this year's Finance Bill was presented was — a sharp slowdown in real GDP growth (6.9 per cent as against last year's Budgetary target of around 9 per cent); widening central fiscal deficit (revised estimate of 5.9 per cent of GDP as against last year's budgetary target of 4.6 per cent of GDP); and continuing pressure due to inflation (projected to be in the range of 6.5-7 per cent by the end of March 2012).

And of course, one can't disregard the ever-constant ‘compulsions of a coalition government' factor, which now acts as a perfect alibi for the government to procrastinate on much-needed structural economic reforms.

Unfortunately, the Finance Minister has miserably failed to address these concerns to the extent that fiscal policy now seems irrelevant to improve India's macroeconomic prospects.

In fact, the Budget pronouncements may actually weaken the fiscal consolidation process; taking India towards a lower growth trajectory (perceptions regarding India's business environment aren't going to improve with pronouncements like ‘retroactively' taxing cross-border share sales, thereby negatively impacting foreign investor sentiments and foreign investments into India); and may further hike inflation in the coming fiscal.

FISCAL TARGETS

On the fiscal consolidation front, the numbers appear quite dodgy. Subsequent to missing the 2011-12 fiscal targets of 4.6 per cent of GDP by a wide margin, the Finance Minister now proposes to reduce the deficit by 0.8 percentage points from the current revised estimate of 5.9 per cent of GDP. The budgetary target of 5.1 per cent of GDP in the 2012-13 fiscal actually represents approximately one percentage points fiscal fall vis-à-vis the trajectory provided by the Thirteenth Finance Commission, suggesting that the deficit should have been 4.2 per cent of GDP next year! Even the government's own 2011-12 Medium Term Fiscal Policy document put the target at 4.1 per cent of GDP next year.

Now, of the proposed 0.8 percentage points reduction in fiscal deficit, the Budget documents suggest that approximately 75 per cent reduction is estimated to come through non-tax revenue sources, including 2G, 4G and phase III FM radio spectrum auctions, and transfer of surplus from RBI, which suggests more reliance on short-term resource mobilisation gains, rather than a long-term focus on fiscal discipline through structural reforms in government expenditure. Further, the Finance Minister has assumed that with the non-tax revenue component being highly inelastic, it will be possible to raise non-tax receipts from Railways and posts by periodic revision in user charges!

If the post-Railway Budget scenario is any indication, may we say R.I.P. to such an impractical assumption? The proposed amendment to the FRBM Act, 2003, will only shift the goalpost of fiscal consolidation. Resorting to fiscal engineering, like devising a new fiscal indicator called the ‘effective revenue deficit', may make the government's achievement on the fiscal front look relatively respectable, but it will dilute focus in achieving real fiscal prudence.

SUBSIDY

On the expenditure front, the FM has, of course, estimated that there will be an approximately 14 per cent drop in food, fuel and fertiliser subsidy than the revised estimated for the current fiscal, thereby bringing down the total subsidy expenditure to GDP ratio to 2 per cent.

The calculations can horribly go wrong, thanks to National Advisory Council's populist and half-baked Food Security Act, which will add an estimated Rs 30,000 crore to subsidies. In the run-up to the 2014 general elections, more such schemes can be expected.

The oil subsidy component is proposed to be reduced by nearly 36 per cent compared to the previous fiscal, assuming a price of $115/barrel of crude oil for calculations. The FM has, again, under-Budgeted fuel subsidy, as experts indicate that crude prices shall average anywhere between $125-150 per barrel in the next fiscal, particularly if the Iran crisis persists.

In such a scenario, fuel subsidy could add an estimated Rs 40,000 crore to government borrowing. An alternative would be to ‘bite the bullet' by raising prices on kerosene, diesel, and petroleum products.

Given the fragile political arithmetic, the question is if the government will show the political will to effect deregulation on all energy products.

REVENUE DEFICIT

What is more worrying is that the budgeted revenue deficit at 3.4 per cent of GDP is high, and accounts for two-thirds of the fiscal deficit.

The primary deficit has also been persistent at around 2 per cent of GDP for the past couple of years. What these effectively mean is that the government has to borrow as much as Rs 5.6 trillion to just finance its current expenditure next fiscal, with no assets created to service the borrowings in process.

In fact, government credit, as a proportion of private credit, is estimated to rise by 2-3 percentage points, to 52 per cent in 2012-13. Higher government borrowings will reduce the supply of loanable funds, will effectively harden the interest rates, will crowd out private investments, and will negatively impact growth.

With less money available for companies to borrow, the central bank shall, therefore, have to resort to more pro-active open market operations to generate liquidity. Quietly, but surely, the FM has passed on the baton to the RBI to reconstruct the fiscal health of the economy!

Overall, the FM has failed to press for growth and reforms in the agenda. India is passing through a structural slowdown, requiring next generation structural reforms. The FM, perhaps, reads it as a cyclical slowdown, and hence has only done a usual reactive job!

(The author is Assistant Professor, Indian Institute of Management, Ranchi.)

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