Show me the money

The industry felt badly let down when it turned out that the reform agenda articulated in the budget was a far cry from the hopes raised in the Economic Survey
Noor Mohammad Delhi

The Union budget for the financial year 2009-10 has proposed hefty hikes in public spending on infrastructure and social sector projects in a bid to revive the sagging domestic demand in a time of falling exports. Though a welcome move from the perspective of long-term economic growth, it has given rise to serious fiscal concerns. Enhanced public spending will raise the Central government's fiscal deficit to 6.8 per cent of the country's Gross Domestic Product (GDP) in the current financial year. The budget has not outlined any strategy on how the fiscal deficit will be brought back to an acceptable level once the economy on the track. This has left financial markets wondering if the government is really serious about containing fiscal deficit. However, the budget seems to have gone down well with the aam aadmi.

Significantly, this is the second consecutive year of high fiscal deficit. The spending by the Central government went up by a massive 33 per cent in 2008-09 whereas its revenue receipts rose by 3.7 per cent only. This was due to additional revenue outflows from the government exchequer owing to factors like the hefty rise in government salaries, large debt waiver for farmers, substantial rise in expenditure under the National Rural Employment Guarantee Scheme (NREGS), reduction in excise duties and petroleum taxes. This pushed up fiscal deficit to 6.1 per cent in 2008-09 from the level of 2.7 per cent in the preceding fiscal.

"The budget has failed in restoring confidence the lack of which is a reason for the current economic slowdown. The policy of continued demand stimulus without tackling the huge supply side problems through a 'reform stimulus' is likely to fail in stimulating the economy," said Mathew Joseph of Indian Council for Research on International Economic Relations (ICRIER).

The budget has targeted mobilisation of just Rs 1,120 crore in the current fiscal as against the projection of Rs 25,000 crore drawn up in the Economic Survey. Meanwhile, growth in the government's revenue receipts is expected to remain sluggish due to the economic downturn. In such a situation, the Central government has projected its borrowing needs for the current financial year in the range of four lakh crore rupee. This has fueled concern that the private investment might be crowded out.

Additionally, the state governments have been permitted to incur a fiscal deficit of up to 4 per cent of their gross state domestic product (GSDP) in 2009-10, higher than both the initial target of 3 per cent set under the Debt Consolidation and Relief Facility and the relaxed target of 3.5 per cent announced previously. The borrowing programmes of the Central and state governments are likely to put an upward pressure on bond yields and negatively impact the banking sector.

"India's high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India (BBB-/Negative/A-3) may be lowered," international credit ratings agency Standard & Poor's reckoned.

The high estimate of fiscal deficit in the budget has led many to paint a doomsday scenario similar to the 1991 when Indian rupee came under speculative attack in the wake of sudden flight of foreign capital. However, Suman K. Berry, a senior economist, does not think that situation is so bad. According to him, India's comfortable position in foreign currency reserves negates any such possibility.