A poll calculation gone wrong

Budget 2013-14, in a sense, had just one big objective: to cut fiscal deficit drastically and create a case for growth-promoting monetary policy intervention by the Reserve Bank of India. Let us take two time periods: 2011-12 and 2013-14. In 2011-12, the fiscal deficit was 5.9 per cent, which is projected to fall to 4.5 per cent in 2013-14.

At the same time, the gross tax revenue is expected to grow slower from 10.1 per cent of gross domestic product (GDP) in 2011-12 to 11.1 per cent of GDP in 2013-14. In other words, the overall strategy of the Budget necessarily entails a cut in expenditure.
The strategy to cut expenditure had already begun from the last financial year, i.e. 2012-13. Compared to the budgeted total expenditure of Rs 14.9 lakh crore, the government actually spent only Rs 14.3 lakh crore, or Rs 60,100 crore less. If we take plan expenditures, the fall was steeper; compared to the budgeted amount of Rs 5.2 lakh crore, the government spent only Rs 4.3 lakh crore or Rs 91,838 crore less. As a result, comparisons of budgeted allocations for 2013-14 with the revised estimates of 2012-13 are misleading. For instance, the Budget shows a rise in plan expenditure between 2012-13 (revised estimate) and 2013-14 (Budget estimate) of Rs 1.3 lakh crore. However, if the 2012-13 (BE) and 2013-14 (BE) are compared, the rise in plan expenditure is only Rs 34,297 crore. In real terms, this may even represent stagnation, if not a fall.
If the government simply refused to spend last year, the strategy for the coming year is to drastically cut subsidies. Last year, the government had announced that subsidies would be limited to two per cent of the GDP. As if that was not enough, the announcement this year is to limit subsidies to 1.75 per cent of the GDP. There is absolutely no economic rationale for such arbitrary targets being set for subsidy outlays. The amount of subsidies to be provided to each sector is to be determined by how much each sector needs, given its overall socio-economic significance. To subject it to such arbitrary cuts is nothing but dogmatic thinking.
Which sector is likely to face the sharpest cut in subsidies? Undoubtedly, petroleum. Compared to Rs 96,880 crore in 2012-13, the budgetary allocation for petroleum subsidies in 2013-14 is only Rs 65,000 crore, or Rs 31,880 crore less. Thus, the government is determined to sharply raise petroleum prices in the coming year. This is quite apart from the declared policy of shifting petroleum prices according to global price changes. That such a policy is being declared in the midst of persistent inflation rates does not appear to bother the government. Further, the allocation for food subsidy is raised only by Rs 10,000 crore, while the requirement is likely to be far higher in the light of the contemplated food security legislation. Where will the money come from?
Apart from proposing cuts in subsidies, the growth rates of expenditure on major economic sectors are also set to fall in 2013-14 as compared to 2012-13. For economic services as a whole, the growth of revenue expenditure is to fall from 13.5 per cent between 2011-12 and 2012-13 to 6.8 per cent between 2012-13 and 2013-14. In agriculture and allied sectors, the growth of revenue expenditure is to fall from 7.9 per cent between 2011-12 and 2012-13 to 5.6 per cent between 2012-13 and 2013-14. Capital expenditure in agriculture are set to fall in absolute terms. Thanks to last year’s poor rainfall, we are staring at one of the worst drought years in rural India. Yet, the rise of revenue expenditure for irrigation and flood control is just Rs 698 crore.
Another example of expenditure compression is in the flagship programme of the government: the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In 2012-13, the budgeted allocation for MGNREGA was Rs 33,000 crore. The implementation of the scheme has been in the doldrums, thanks to governmental inaction and the strong opposition to the scheme from landlords and rich peasants in villages. As a result, the actual expenditure on MGNREGA in 2012-13 was lower, at Rs 29,387 crore, or about Rs 4,000 crore less. For 2013-14, the government has allocated
only Rs 33,000 crore and claimed an increase over the actual estimates of 2012-13. However, the fact that not a rupee more than last year’s budgeted allocation has been earmarked for MGNREGA shows complete governmental disinterest in successfully implementing its own flagship scheme.
The deliberate cut in spending last year did not prevent the government from allowing corporate tax exemptions to rise in the last year. In 2011-12, the revenue foregone from corporate taxpayers was Rs 61,756 crore, which has risen to `68,008 crore in 2012-13. This represents a 10 per cent rise. If we take the aggregate tax revenues, the amount foregone was Rs 5.33 lakh crore in 2011-12 and Rs 5.73 lakh crore in 2012-13. This represents a seven per cent rise, which is lower than the rise in corporate tax income foregone.
As the Budget document admits, “The total revenue foregone is showing an upward trend, both for direct and indirect taxes.” While the government does not appear to have any qualms in allowing corporate taxes to go uncollected, it puts its foot down in the case of subsidies for the poor.
Across the world, people are rising in anger against policies of financial austerity which have led to sharp cuts in social spending. Western governments, which once lectured developing countries about the need for cutting deficits, have themselves broken all rules to raise deficits in times of crisis. All efforts to cut deficits have met with powerful people’s struggles, and these struggles have already pulled down many powerful rulers. There is increasing realisation that deficit reduction has to be revenue-led, and not expenditure-led.
Yet, the Indian government appears to be in no mood to listen to voices of people from across the globe. Will its people reply in 2014? All indications are in the affirmative.

The writer is an economist and associate professor with the Tata Institute of Social Sciences, Mumbai