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Clever! Very Clever!

Omkar Goswami

At 1 pm on 29 February 2008, when Palaniappan Chidambaram sat down after commending “the Budget to the House”, he knew that he had scored a triple century. The 2008-09 budget completely took the wind out of the opposition’s sails, leaving them becalmed and bewildered in equal measure. It won outright kudos from industry. Its bountiful largesse to all segments of society that mattered effectively prepared the ground for an earlier election, if necessary. And the exercise was entirely couched in the language of a caring reformer who was returning to society its just dues while preparing an even stronger framework for inclusive growth. It was a masterly performance delivered with great thespian skill — Mr. Chidambaram’s “coming of political age” budget.

At the core of this budget is the FM’s confidence in India’s phenomenal entrepreneurial growth, which has yielded him enviable revenues. The revised estimate of net tax revenue to the Centre for 2007-08 has been 25 per cent greater than the revised estimate of the previous year. He is betting on revenue buoyancy in 2008-09, and has factored in another 17 per cent growth in net tax revenue. If that is surpassed, Mr. Chidambaram will have the money for the funding of every social sector programme announced in this budget, account for the huge loan write-off and the Sixth Pay Commission, and still keep deficits within limits.

The headline item has been the Rs.60,000 crore loan write-off for indebted farmers. What do I think of it? The economist in me gets worried because of moral hazard issues. Farmers who borrowed and repaid will look stupid and learn a very different lesson; moreover, once begun, loan write-offs have a bad habit of reappearing every now and then like bad pennies. But the political voice in me says something quite different: “Poor farmers badly need relief. Yes, this is short term succour. Yes, much more needs doing to increase incomes and rural employment. But if I can afford it, why not give it?”.

Mr. Chidambaram hasn’t accounted for the waiver in the budget. This is what I think he will do. After calculating the actual hit to the banks — which I reckon will be around Rs.35,000 crore — he will recapitalise the banks by some special bond issue, and not take it on to the budget.

This ‘below-the-line’ off-budget means of financing increasingly bothers me. We already have two such major items: Rs.11,257 crore worth of oil bonds issued in 2007-08, and Rs.7,500 crore of bonds to fertiliser companies. To this will be added another off-budget bond issue of Rs.35,000 crore. This is creative accounting to maintain FRBM targets; not the transparency that modern budget-making deserves.

The FM has also not factored in the Pay Commission impact because the report will be submitted only on 31 March. The initial effect during 2008-09 will probably be around Rs.25,000 crore, give and take a few hundred.

So, what additional expenses could we be looking at in 2008-09? Rs.25,000 crore because of the Pay Commission; another hit of Rs.15,000 crore because of high crude oil prices and no pass-through; an extra Rs.7,500 crore as securities issued to fertiliser companies; plus Rs.35,000 crore for the loan waiver. In total, an extra amount of something like Rs.82,500 crore. If this was brought above the line, and revenues remained the same, the true fiscal deficit for 2008-09 will be 4 per cent of GDP, and not the 2.5 per cent estimated in the budget.

Does it matter? It does, in the sense of giving up on fiscal rectitude that has taken long years to develop ever so imperfectly. But the FM may be lucky yet again. If net tax revenues increase by 20 per cent instead of the 17 per cent estimated in the budget, Mr. Chidambaram is home and dry — even with everything being taken above-the-line. At 17 per cent revenue growth with fully transparent, above-the-line accounting, he may be in trouble.

That’s exactly what he is betting on. He believes that growth will not slowdown in any alarming manner; that huge expenditure outlays and loan relief will stimulate domestic demand; and that excise relief will ignite the booster fuel in the manufacturing sector. Let’s hope he is right. Because while mega-Keynesian budgets like this get scores of 9 out of 10 in the heady moments, they have a habit of getting unstuck. Mr. Chidambaram doesn’t need that. Everything hinges on high growth. So, ladies and gentlemen, please join me for a Vishal Jagaran to pray for 8.5 per cent growth in 2008-09.
 Published: Business Standard, March 2008


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