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