The Budget Sudoku

If the government believes that a relatively lower inflation rate will delude voters into thinking that food prices will be coming down, they are fooling no one except themselves

Now that the proposals contained in Union Budget 2013-14 have been dissected and debated for nearly a fortnight, it is worth revisiting certain key assumptions and projections that will determine whether finance minister Palaniappan Chidambaram’s numbers are credible or not. Importantly for the Congress, and the UPA, the estimates made in the Budget and the overall direction of the government’s economic policies will willy-nilly determine the fate of the ruling coalition in the 16th general elections scheduled for March-April 2014.

The government headed by Prime Minister Manmohan Singh clearly believes that the policy trajectory articulated in the Budget represents both good economics and good politics. But there are many, including some within the Congress Party, who remain unconvinced about the ability of the extant economic policy regime to become politically efficacious or simply put, ensure that the number of members of Parliament belonging to the Congress does not fall below 160 in the next Lok Sabha from 203 at present.
For the ordinary voter, the fiscal deficit as a proportion of the country’s gross domestic product (GDP), which approximates the total amount the Central government borrows in a particular year, means absolutely nothing. For the finance minister, however, reducing the fiscal deficit to 5.2 per cent of the GDP during the current financial year and 4.8 per cent the coming year is an article of faith. For the proverbial person on the street, the even more worrisome current account deficit (or the gap between inflows and outflows in the country’s external balance of payments), which is currently at five per cent of the GDP, too means next to nothing.
For that matter, the much-touted growth rate of the GDP also matters little to the aam aadmi, that is, unless economic growth leads to creation of new jobs and brings down the rate of inflation in general and food prices in particular. The Prime Minister and Mr Chidambaram repeatedly emphasise that without a fast GDP growth there cannot be either development or “inclusion”. This is precisely where the problem lies, in what the finance minister himself describes as his “mool mantra”. It can be argued, for instance, that some of the assumptions that are implicit in the Budget will not merely fail to curb inflationary expectations but, on the contrary, spur them. Here are a few reasons why.
The Budget has assumed the GDP growth rate of 13.4 per cent in nominal terms in 2013-14 or a real GDP growth rate of 6.5 per cent and an inflation rate of 6.5 per cent as measured by the official wholesale price index (WPI). In other words, the GDP growth rate is projected to rise from five per cent to 6.5 per cent while the WPI would remain more or less where it is at present, although both the consumer price index and food inflation are above double digits.
At the same time, the Budget has assumed that the outgo on subsidies on petroleum products will come down sharply from Rs 96,880 crore (revised estimates for the current year) to Rs 65,000 crore (Budget estimates for 2013-14) — a fall of Rs 31,800 crore. Is this realistic? What the finance minister is tacitly assuming is that world crude oil prices will be relatively stable at present levels (since we import 80 per cent of our total requirements of crude oil) and that diesel prices will creep up to “import parity” levels. If that indeed happens and since diesel is a universal intermediate (whose price influence the prices of a host of articles of mass consumption), the government will be unable to contain inflation at the indicated level.
Consider food subsidies, which have come down from Rs 85,000 crore to Rs 80,000, if one excludes the extra Rs 10,000 crore given by the finance minister ostensibly to operationalise the proposed new right to food law. If minimum support prices given to farmers go up (as they do every year), if the Food Corporation of India’s transport expenses rise on account of higher diesel prices and if the proposed new law is enacted before the next elections, the food subsidy is certain to rise significantly from what has been assumed. This holds true for the fertiliser subsidy bill as well, which, Mr Chidambaram has claimed, will remain almost constant.
Time alone will tell if the government is able to convince large sections of the electorate that it is indeed serious about creating new employment opportunities and containing food inflation. If the spokespersons of the incumbent government believe that a relatively lower inflation rate (as measured by the WPI) will delude voters into thinking that food prices will be coming down, they are fooling none but themselves. A lower inflation rate merely means that the speed or pace at which prices are going up has slowed down. An analogy would be that of a car which was earlier travelling at, say, 100 kilometres per hour and which has now decelerated to 60 kmph.
Why is the government so keen on cutting the fiscal deficit? One reason is to check government borrowings that tend to crowd out private borrowings. The other reason is that high fiscal deficit leads to inflation in the medium term as more money chases fewer goods. If, however, the cut in the deficit is achieved by cutting subsidies on the three F’s — food, fuel and fertiliser — which in turn does not reduce inflation but increases it, the government will end up cutting its nose to spite its face. That’s why Mr Chidambaram may not be able to have his cake and eat it too. And that’s why the Prime Minister’s policies may end up being lousy economics as well as pathetic politics.

The writer is an educator and commentator

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