The Budgeting Trick

Written by Sijal Fawad  •  Region  •  May 2013 Print

India’s recent fiscal budget appears to be practical and realistic but not without a few caveats.

The moot point over India’s 2013-14 budget stems not just from the budget itself but also the deceleration of the country’s phenomenal rate of growth over the past few years, which has made the country’s fiscal dynamics even more critical. The highlight of the recent budget was a 16 percent increase in public expenditure relative to the previous year – a controversial move at a time when India is trying hard to keep its fiscal deficit in check.

And yet, the country needs to prop up GDP growth numbers too, for which impetus from public spending is much needed. For FY2013-14, the government projects an increase of 6.1-6.7 percent in the country’s GDP, which is higher than the 5 percent seen for the current fiscal year, but still short of the previously high growth figures achieved before the global financial crisis.

That this is the last budget before the next elections makes it even more critical for the current ruling party. That explains why this time job creation ranks high on the government’s agenda with a strong focus on growth in certain key sectors. These include information technology (IT), infrastructure, education, domestic manufacturing, etc. Reductions in subsidies, in particular oil and fertilizer, with the subsidy bill limited to below 2 percent of the country’s GDP, appear to be an attempt to keep the fiscal deficit in check. However, analysts are cognizant of how slippages usually take place when it comes to the actual expenditure on subsidies.

At the same time, the Food Security Act raises the bar and becomes a shining example of a populist measure from the government. Rs900 billion has already been allocated to food subsidies 2013-14, relative to a revised estimate of Rs850 billion spent in 2012-13. Besides this, social spending in other areas will also receive a boost with the Ministry of Health and Family Welfare receiving 40 percent more than what was allocated for it in the previous year, as well as a greater outlay for the Ministry of Human Resource Development.

In light of these policy initiatives, to say that the 2013/14 budget is devoid of any populism would be a misleading statement. The fact that government spending itself will be increased – as has traditionally been the case with most pre-election budgets – indicates the presence of political motives. By targeting the rural poor through food subsidies, social welfare policies and other developmental projects, the Congress is successfully targeting its key vote bank. In addition, the budget also addresses recent public outcries over women’s security in the country through a $185 million fund devoted to an all-women public sector bank, public campaigns about violence against women and support for rape victims.

Similarly, the defense budget warrants attention as a hike of a relatively modest 5 percent was noted, relative to an increase of 17 percent in the previous budget. Pegged at $40 billion, the budgeted amount is perceived as being meager by analysts and commentators. “Within the Indian context, it means that India’s defense expenditure for 2013-14 will be at the lowest point in three decades. This should be enough only to meet the expenditure on account of pay and allowances and maintenance of the weapons systems,” said Rajeev Sharma, a New Delhi-based strategic affairs analyst, in an article in the Global Times.

Given that Indian defense forces are in dire need of modernization, allegations of populist motives behind the relatively nominal increase in the defense budget have made waves. In order to make room for expenditure for the aforementioned social welfare schemes, the defense budget bore the brunt. For a country with a population of nearly 1.2 billion people, greater emphasis on national security has to be realized. Pakistan, India’s long-term rival, allocates a greater percentage of its GDP to defense spending than India, making many question the discretion of the government in continuing to strip the armed forces of their needed revenues at a time when the country’s aging military equipment needs to be upgraded and modernized.

As if internal fiscal issues weren’t enough, India’s external debt situation also warrants considerable attention with trade deficit problems adding to the problems. For the third quarter of 2012, external debt rose to $365 billion. Crisis in the Eurozone and stagnant growth in developed economies has certainly taken a toll on India’s exports, leading to a trade deficit that has to be funded by foreign currency debt. To effectively address the external debt problem, India will have to undertake policies that can help keep the trade deficit in check. Improving export competitiveness, curbing import demand and attracting foreign direct investment in various projects are prescribed measures for reducing the trade deficit. Besides, external commercial borrowings and short-term debt have also contributed to the significant rise in external borrowings, warranting the government to take measures to curb these.

Holistically, India’s budget has been largely dubbed as being realistic and balanced but not without a few caveats. It targets a modest drop in fiscal deficit from 5.2 percent of GDP in 2012-13 to 4.8 percent in 2013-14, which seems reasonable given the macroeconomic problems of subdued GDP growth and bearing in mind that elections are around the corner. However, the growth rate target may become a tad hard to reach and there’s likelihood of the subsidies bill exceeding the targeted amount too. Yet, the budget seems as realistic and practical as one could expect a pre-election budget to be.