Mainstream, VOL LII No 9, February 22, 2014
Vote on Account: Neither Economically nor Politically What was Needed
Saturday 22 February 2014, by
A vote on account is not expected to make any major announcement of policies since it is supposed to be a temporary measure to enable the government to continue its expenditures to maintain itself and the continuing programmes. It is expected that the new government that would take over in a few months from now would present the full Budget. In a way, the government that is on its way out should not tie the hands of the government that is expected to take over by announcing policies. But these are only conventions. Nothing prevents a government from presenting a full Budget. After all, a new government can again go in for a revised Budget if it so desires.
More importantly, in the vote of account for 2014-15 presented now, there are major policy announcements, like changes in excise duties, to boost the profitability of certain industries that are not doing so well and changes in the accounting procedures to show a much larger Central Assistance for State Plans and a reduced Central Plan Outlay. It has also announced ‘one-rank one-pay’ for the retired Army personnel and waiver of interest on loans to students. Thus, where the ruling party felt it could gain electorally by announcing schemes, it has done so. The question then is: why did it not go further on some crucial matters for the economy?
As the Finance Minister has spelt out, the economy has been slowing down for the last nine quarters. Further, the economy has shown a high degree of macro volatility since the Fiscal Deficit, Current Account Deficit in foreign trade and inflation have shown adverse trends in the recent past. In the last five years, the government has repeatedly said that soon the rate of inflation will decline and invariably that has not happened; it has remained persistently high with ups and downs.
The government’s claims for the next year are not anchored on the prospects of the economy. Its budgetary numbers are predicated on a growth in the nominal GDP of 13.4 per cent. Given the government’s claim that inflation is running at five per cent and the economy will grow at about six per cent, the GDP growth will at best be 11 per cent. Even this is unlikely since the principal problems in the economy are not being addressed. Thus, the budgetary calculus is likely to go wrong and the new government will have to bear the burden of correcting a deteriorating situation.
Inflation is measured by the Wholesale Price Index (WPI) which does not represent the true inflation in the economy since it does not give any weight to services. So, for instance, it does not reflect the rise in the cost of education or health. Even public institutions are charging higher prices to come closer to the market prices. This is on the plea that subsidy is undesirable for the Budget and economy. The public is confused and thinks that a fall in the rate of inflation means lower prices. This is not true since a decline in the rate of inflation only means a slowdown in the rate at which prices are rising. So as long as the inflation rate is positive prices continue to rise. With inflation, the public finds its purchasing power declining and its standard of living affected.
The Finance Minster proudly proclaimed that he is on the path of fiscal consolidation since he has kept the Fiscal Deficit for the current year (2013-14) below the target of 4.8 per cent. But how has he achieved it when tax revenues have fallen short by about Rs 77,000 crores (by 6.5 per cent) compared to the Budget estimates? There is a drastic cut in the Plan size (by Rs 80,000 crores). This is a trick the Finance Minister has been playing on the public consistently year after year. The fiscal deficit target is being achieved by compressing essential expenditures. This is like chopping one’s nose to cure one’s cold.
Thus, when the Budget is presented, to show the government’s seriousness about the Plan for public consumption, inflated figures of Central Plan allocations are presented before Parliament. But after a year, when the next Budget is presented, the actual figures show that much less than the budgeted amount is spent so that the Plan targets remain unfulfilled.
The shortfall for 2009-10 was Rs 41,009 crores, for 2010-11 Rs 60,168 crores for 2011-12 Rs 83,861 crores, and for 2012-13 Rs 1,53,033 crores. The shortfall of RE over BE for 2013-14 is already Rs 65,989 crores. Thus the total shortfall of the Central Plan expenditure over the five years amounts to more than Rs 4,04,000 crores. When Plan expenditures are cut, it implies a shortfall in public investment. No wonder there is shortage of infrastructure like power, water and railways. Further, this leads to a slowdown in the economic rate of growth as the demand falls short and bottlenecks appear. Additionally, it leads to unfinished projects since allocations for them are inadequate. The country has witnessed a slowdown in exports while imports remain high. Energy and gold imports have contributed substantially to the high level of trade and Current Account deficits (CAD). High gold imports are a result of the demand in the economy due to the uncertainty and the desire of the savers under the circumstances to buy more gold as a hedge. Energy imports have been high since coal production has not kept pace given the uncertainties regarding coal mine allocations due to the corruption cases and environment considerations.
The result of a high CAD has been speculation on the value of the rupee and a decline in its value vis-a-vis the foreign currencies. It fell to a record low of Rs 68 to the dollar. The problem was compounded by the signals emanating from the Federal Reserve (the US Central Bank) regarding phasing out of the quantitative easing. This opened the possibility of drying up of easy liquidity available in the international financial markets in the last few years; this was driving foreign investments into the emerging markets. The slowdown in China and tepid recovery in the US and other advanced economies add to the uncertainty for the world economy. Thus, the external picture has been one of great uncertainty not only last year but over the last three years. This is likely to endure and it will continue to impact the CAD and value of the rupee.
The high CAD has also resulted in a rapid rise in the debt of the country and especially of the short run kind that causes greater instability. The foreign debt of the country is about $ 100 billion more than India’s foreign exchange reserves. That is the signal to inter-national speculators that there is a weakness to be exploited here. While the steps taken by the government and the Reserve Bank to check short-run speculation and reduce the inflow of gold have stabilised the rupee somewhat, these are not enough. Reports are that gold is being smuggled in at an increasing pace and this can again add to pressures on the BOP. So, the situation will remain precarious as long as India’s macro economy is not stabilised. An important reason for the slowdown of the economy is the decline in the investment rate in the economy. It had peaked in 2007-08 and since then it has declined by about five per cent. An important reason for this decline is that investments in India have been based on crony capitalism and in the last four years with the exposes of various scams and cancellation of licences, businessmen face uncertainty. Further, the government’s decision-making has slowed down with the policy-makers (politicians and bureaucrats) delaying decisions. So, the model of crony capitalism has collapsed and no new one has emerged.
Corruption has also meant that the public has viewed the large investment decisions of the private sector with suspicion. People do not want to give up their land since they believe that natural resources are being looted by the businessmen along with the politicians at their expense. Thus, movements against displacement have become strong and projects have stalled both in the public and private sectors. We have had the examples of Singur, POSCO, Nandigram, Raigadh, Jaitapur, Greater NOIDA and so on. The courts have also viewed with suspicion the various land acquisition demands. Thus, invest-ment by the private sector, both foreign and Indian, has slowed down. As already mentioned, the public investment has slowed down due to the cuts in the Central Plan size in the last five years.
At the root of the instability in the economy is the black economy and indiscriminate opening up leading to the BOP problems. The black economy results in higher costs and waste which causes prices to rise. It also leads to speculative activity and episodic price increases as in the case of onion prices last year. This is compounded by the connivance between the businessmen and policy-makers. The black economy results in shortfall in tax revenues and higher expenditures due to corruption so that the fiscal and revenue deficits are larger than they need be. Due to the flight of capital and under- and over-invoicing of trade and transfer pricing, the BOP turns adverse. Thus, the instability in the economy is a direct result of the black economy which results in the BOP problem, high Fiscal Deficit, higher inflation and a slowdown in investment both by the private and public sectors.
The indiscriminate opening up has led to the reduced policy-space for the government. The government has targeted the Fiscal Deficit as the main variable to operate on since the credit rating agencies look for it hawk-eyed. So, it has not minded the expenditure compression even if that has meant a slowing down of the economy and consequent bottlenecks and problems. It has been warned by analysts that private investment is unlikely to pick up much in the near future given the uncertainty of the coming elections and the likely prospects of a hung Parliament. The FM’s claim that massive invest-ment projects have been sanctioned does not amount to much in a period of the uncertainty since sanction does not mean the decision to invest. The only chance for the economy to come out of the slowdown was an increase in public investment. For this the black economy had to be effectively tackled. One does not have to close the economy to regain the policy-space but only tackle the black economy. However, the government has been reluctant to do so in the last five years and continues to be so.
The government had a chance in the vote on account to take adequate steps to tackle the macroeconomic imbalances. It has not thought it prudent to do so because these may be seen to be policy-decisions. However, since it has taken some policy-decisions as already pointed out, it should have taken the really critical decisions on stabilising the economy. Instead, the Finance Minister spent much energy on showcasing the UPA’s economic performance in the last 10 years and especially when he was the Finance Minister.
To conclude, the Finance Minister has claimed that of late the various deficits have moderated and so the UPA Government’s policies have been on track. But the experience of the last five years is that the government has not been able to deliver on its claims. It has repeatedly claimed in the last three years that the price rise would moderate and the rate of growth would pick up; but this has not happened. Consequently, the credibility of the government has been low and the public has voted against the Congress in the recent Assembly elections. If the government’s performance was indeed good, why would it lose so comprehensively? If one ponders over this, it is clear that the vote on account neither delivers politically what the Congress-I needed nor economically what the country requires at this juncture—a lose-lose situation for all.
The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawarhal Nehru University, New Delhi. He is also the President, JNU Teachers’ Association (JNUTA). He can be contacted at email@example.com and arunkumar@ mail.jnu.ac.in