No kickstart for growth

N Chandra Mohan Delhi

The fact that India is one of the fastest growing economies in the world, with gross domestic product (GDP) growth of 8 per cent per annum during the last three years, has provided an extremely favourable context for Union Finance Minister P Chidambaram’s recent budgets. The current 9 per cent GDP growth trajectory will do the same for his budget to be announced on February 28, 2007. Faster GDP growth leads to buoyancy in taxes, which hold out the promise of lower tax rates, as has been hinted at by Chidambaram. Deficit reduction targets can also be met as per the Fiscal Responsibility and Budget Management Act (FRBM).

But how sustainable is India’s rapid growth? Currently, there are worrying signs of rising inflation that has touched 6 per cent showing the first symptom of overheating in the economy. Anticipating this problem, the Reserve Bank of India has signalled that money will no longer come cheap. But sooner or later, it will have to take a call on hiking interest rates that can potentially affect growth. Sustaining growth calls for reforms, especially in the financial sector. But these seem to be on the backburner due to the Left opposition. Sustaining growth also calls for budgetary surpluses to fund infrastructure.

While the growth momentum, no doubt, does help the finance minister to meet budgetary commitments, there are major constraints that he faces being part of the United Progressive Alliance (UPA)-led government, a coalition that depends on the Left for political survival. Coalition allies like the DMK and the Left have, for instance, have put brakes to the partial sales of the government’s stake in public sector undertakings (PSUs) — an easy means of raising resources for funding UPA’s social priorities like the National Rural Employment Guarantee Scheme, Bharat Nirman and so on.

For other key reforms as well, Chidambaram has stated in interviews, “when I took on this job I was aware that we are in a coalition. I was aware that the Left has a particular point of view. I am still hopeful that we can get over the last hurdle in terms of the pension bill. The banking bill is stuck at a clause… The insurance bill will be introduced towards the end of the budget session. Even if we can take one step at a time, and get my pension bill through, and get over the last hurdle in the banking bill, you will find that in 2007-08 there is a dramatic improvement in the climate of the financial sector”.

Negotiating these hurdles is far from easy. Neither is it any easier to create fiscal space in the budget by cutting down non-plan revenue expenditure such as those on subsidies and wages and salaries of administration. The robust growth of the economy, no doubt, leads to higher tax collections. But so long as revenue expenditures keep mounting, the government will perforce have to borrow even to meet routine housekeeping expenditures. When revenue deficits, thus, are not under control, from where then will the budgetary surpluses be generated for public investments in infrastructure?

The budget, for its part, is more than a statement of the government’s finances. A revenue deficit is incurred when tax revenues are not sufficient to meet day-to-day expenditures of the administration. Like any individual in a similar situation, it will have to borrow or spend less. Borrowings are reflected in the fiscal deficit. The budget is also an occasion to articulate the government’s agenda on economic reforms — like liberalising foreign direct investments in retail trade or Special Economic Zones (SEZs) land acquisition norms, besides indicating how it would meet targets on deficit reduction as per the FRBM.