Dream budgets, fiscal nightmares

With five assembly elections ahead, the finance minister has to balance imperatives of coalition politics with the need to keep up the growth momentum and adhere to budget deficit reduction targets

N Chandra Mohan Delhi

Even if they later turn into fiscal nightmares, dream budgets are what union finance minister P Chidambaram is best known for. These hold out the promise of lower tax rates-making them hugely popular with the urban middle class and business-men—while boosting overall growth. As the ruling United Progressive Alliance (UPA) government is in power with left support, he also has to budget for higher expenditures as per the National Common Minimum Programme (NCMP) such as the national rural employment guarantee scheme and Bharat Nirman and still meet his revenue and fiscal deficit targets.

The union budget is an annual statement of the central government's finances. A revenue deficit is incurred when its tax revenues are not sufficient to meet its routine expenditures of administration. Like any individual or firm in a similar situation, it will perforce have to borrow or spend less. Another word for borrowings is the fiscal deficit. Even though the budget is also an occasion to articulate the UPA government's line and length on reforms—like further liberalising the regime for foreign direct investments, say, in the retail sector or insurance—the main effort is to meet the targets on deficit reduction.

What will complicate Chidambaram's efforts to spin another dream budget
on February 28, 2006 is the Fiscal Responsibility and Budget Management Act, 2004 (FRBM), according to which he has to reduce the revenue deficit by 0.5 per cent of GDP and fiscal deficit by 0.3 per cent every year, starting 2004-05. The left, for its part, has ruled out softer options to lower the fiscal deficit through disinvestment or partial sales of government's equity in public sector undertakings (PSUs) although the finance minister confidently states in every forum that the disinvestment process is very much 'on track'.

The UPA government and its allies also face the compulsion of fighting five state assembly elections in 2006, which further narrows Chidambaram's room for manoeuvre in reducing wasteful expenditure as on subsidies. Exemplifying such pressures is the recent decision of the UPA government to 'put on hold' its decision to reduce the food subsidy bill which has been budgeted at whopping Rs 26,200 crore in 2005-06. Accordingly, the decision to raise the issue price and cut allocations of rationed foodgrain to reduce the subsidy bill has been deferred till the elections are out of the way. 

'Terming it as a dream budget on the first day is very superficial. It should be made at the end of the financial year,' an understandably cautious finance minister recently told the Forum of Financial Writers. 'If a budget, together with other major policy initiatives taken by the government, promotes a growth of say, over, 7 or 7.5 or 8 per cent, it can be classified as a good one,' he added. While promising that tax rates will not be raised, he has also hinted that government will cut the revenue deficit by 0.5 per cent to 2.2 per cent of GDP and the fiscal deficit by 0.3 per cent to 4 per cent of GDP in 2006-07. Chidambaram's confidence to deliver such a budget stems largely from the robust growth momentum of the Indian economy, which grew by 8 per cent in two successive quarters in 2005-06 and 7.5 to 8 per cent for the year as a whole. All his budgets, in fact, assume that this faster pace will continue during the next few years—overall growth of 7 to 8 per cent with inflation of 4 to 5 per cent. It is this favourable context of faster growth-making India—one of the fastest growing economies in the world today—that enables the finance minister to fervently hope that his budget will boost growth.