P Chidambaram’s last budget pays tribute to the rating agencies…

EPW edit in the latest edition says the Interm budget 2014-15 was a tribute to the rating agencies.  Well the previous budget was a tribute to the rating agencies as well. In his book Lexus and Olive Tree Thomas Friedman starts it by showing the importance of rating agencies. The book was written way before the crisis but the power of CRAs continues.

What has mattered in the last two years is achievement of the fiscal deficit target and not the mechanics of how it is achieved. Just do it the rating agencies seem to say and Finmin seems to oblige.

As expected and true to form, Union Finance Minister P Chidambaram’s last budget was all about how well the government has done in holding down the fiscal deficit during 2013-14. Indeed, ever since Chidambaram returned to the Ministry of Finance in late 2012, his one priority has been to reduce the fiscal deficit lest India fall afoul of the international credit rating agencies. The finance minister has also used the presentation of the interim union budget for 2014-15 to defend the record of the United Progressive Alliance government (I and II), but that exercise in self-congratulation does not require analysis. It is the fiscal performance in 2013-14 that calls for close examination.

Last year, while presenting the union budget for 2013-14, the finance minister said his red line for the fiscal deficit was 4.8% of the gross domestic product (GDP). He has even bettered that – the 2013-14 revised estimates (RE) show a fiscal deficit of 4.6% of GDP. How has this been achieved? Is it for real? What has been the impact on growth and incomes? It has been the same story two years in a row. In the beginning, make wildly optimistic predictions about how tax and non-tax revenue will grow, and propose some healthy increases in Plan expenditure. Mid-way through the year when things do not look good on the revenue side, slash spending – especially Plan expenditure – with scant regard for the growth momentum. And then repeat the same process the next year. This is what happened in 2012-13 and we had warned then in these columns of this turn of events (“At the Feet of Rating Agencies”, 9 March 2013). This has since come true, though it gives us no satisfaction to be proven right.

At the time the finance minister made an exaggerated budget prediction of a 19% growth in tax revenue in 2013-14 over 2012-13. There has been an increase of just 12% (2013-14 RE). So the finance minister has taken an axe to Plan expenditure. Total expenditure in 2013-14 has been just 4.5% short of the budgeted amount, but Plan expenditure ends up as much as 14% lower than the 2013-14 budget estimates (BE). No sector – infrastructure, rural development, or the social sector – has been spared the cleaver in the anxiety to avoid a downgrade by the London and New York-based rating agencies.

The argument of the finance minister that last year’s budget “over-provided” allocations will simply not wash; this was nothing but a large-scale holding back of allocations. It is evident that once again the Government of India has chosen to ignore the international lessons of the 1990s that the last thing a government should do in the name of fiscal deficit reduction is slash potentially productive expenditure. In 2013-14, total Plan expenditure – capital and revenue – has grown by 15% over 2012-13 in nominal terms, even if it still ends up substantially lower than what was initially budgeted for. However, this is not enough to compensate for the slow or no growth in Plan spending over the past three years. Aggregate Plan expenditure in 2013-14 is only 25% higher in nominal terms than in 2010-11, a zero or negative growth in real terms considering the double-digit inflation in the intervening years.

Well This blog never doubted whether the fiscal deficit target would be achieved. People who have watched PC should have known better. He is really good with this numbers exercise and somehow makes them match the targets.

How PSEs were given lower amount of funds but they ended up giving higher dividends:

Since spending cuts alone are not enough to hold down the fiscal deficit (nor for that matter the bounty from auction of spectrum), the finance minister has turned to other unhealthy measures. The year 2013-14 has seen the central Plan fall short of its budget outlay by 10% partly because public sector enterprises (PSEs) could not mobilise the required internal and external budgetary resources. Yet, the interim budget has been able to extract dividend payments from the PSEs of as much as 44% more than the 2013-14 BE of Rs 29,870 crore. How can the PSEs not find resources for investment but come up with large dividend payouts? The Ministry of Finance must have turned the screws on the PSEs and demanded a massive hike in dividend payments, including possibly advance payments from 2014-15. So much for the sanctity of the budget exercise.

Well, this happens all the time.Sometimes to meet disinvestment targets and sometimes via dividends..PSEs come to the rescue…

PC and his tenure comes with fascinating amount of financial engineering. The finmin can easily give wall street a run for money on this front. How to keep things around the target and make changes is quite a job. But to comprehend what is really going on one needs to really see the numbers with a magnifying lens and understand what is really going on. We need more expertise to understand fiscal accounts and come to a level of finmin team.

There is way too much focus on fiscal deficit as a target and as a result all the details/engineering are missed.


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