A bit like a broken gramophone record (if anybody remembers those shiny black 78s, 45s and 33s which enriched our youth), I have been bemoaning the grievous deterioration in India’s macroeconomic performance, and its underlying causes, in various articles sprinkled liberally in this journal over the past two years (see, for example, columns of August 11, 2011, November 15, 2011, January 12, 2012, April 12, 2012, May 21, 2012, August 27, 2012, and September 13, 2012). These grim warnings and many similar commentaries by other analysts have had little impact on either the curious combination of complacence and helplessness of the government or the seemingly inexorable downward spiral of the economy. Last week’s publication by the Central Statistics Organisation (CSO) of the advance estimates for national income for 2012-13 drove home just how bad the situation has become. Real GDP at factor cost is estimated to have grown by just five per cent, as compared to 9.3 per cent in 2010-11. GDP growth at market prices was even lower, a mere 3.3 per cent, darkly reminiscent of the so-called “Hindu rate of growth” of our pre-1980 decades.
The finance ministry promptly (and most unusually) issued official statements that the CSO had got it wrong; growth would be 5.5 per cent, not five. This pointless squabble over half a percentage point came from a ministry that predicted nine per cent growth (at Budget time) for 2011-12, when the result has been 6.2 per cent, and last March predicted 7.5 per cent for 2012-13, when the result appears to be five per cent. For the mighty finance ministry, entrusted with the nation’s macroeconomic management, to get its short-term growth projection wrong by 2.5 to three percentage points in two successive years is a new and deeply disturbing record — to put it mildly. (Click here for table)
Sharply slowing economic growth is just one, albeit crucially important, facet of our bad economic performance since 2008. As the upper panel of the table shows, our macro performance has worsened on every other major dimension as well, especially when compared to the “golden age” of 2003-08. Inflation, as measured by the broad-based GDP deflator, has been unrelentingly high, at above eight per cent in most years. This is in large part due to the prolonged fiscal profligacy of last five years: the combined (Centre plus states) fiscal deficit more than doubled in 2008-09 from its post-consolidation low of 4.1 per cent of GDP in 2007-08 and has stayed above eight per cent of GDP ever since, except for a short-lived dip in 2010-11 because of massive receipts from one-off telecom spectrum sales. The balance of payments has deteriorated steadily and ominously, with the current account deficit (or CAD in Wodehouse terminology) increasing from less than half a percent of GDP in 2003-08 to nearly three per cent in 2009-10 and 2010-11 and worsening to record levels in excess of four per cent of GDP in 2011-12 and 2012-13. In part, this reflects the substantial decline in gross domestic savings from 37 per cent of GDP in 2007-08 to around 30 per cent at present. The main culprits have been government savings and corporate savings. Gross investment rates have also fallen, but by much less than savings. Indeed, the resilience of aggregate investment rates shown by the national accounts is hard to reconcile with all the other indicators of lacklustre investment such as weak capital goods production, stalled projects and slim order books. Perhaps worse news lies ahead?
It is against this increasingly grim macroeconomic scenario that the Budget for 2013-14 is being framed. Fortunately, there is growing recognition that a reversal of the prolonged fiscal profligacy would help all the major macro problems by reducing inflationary pressures, easing the external imbalance and making room for more of productive investment. Hence, the finance minister’s oft-repeated commitment to hold the central government’s fiscal deficit for 2012-13 at 5.3 per cent of GDP and reduce it to 4.8 per cent in 2013-14 is very welcome. But how is this going to be done? Let us seek clues in recent fiscal trends, shown in the table’s lower panel.
A quick inspection reveals some salient features of trends since the “golden age” and until 2011-12 (outcomes for 2012-13 are still unknown). Between 2007-08 and 2011-12, both fiscal and revenue deficits deteriorated by 3.5 per cent of GDP. About two-thirds of this worsening was due to a decline in the ratio (to GDP) of revenue receipts, especially tax receipts (net of transfers to states). The total expenditure ratio also increased, but only modestly, because the rise in the revenue expenditure share by 1.2 per cent of GDP (mostly because of ballooning subsidies) was partially offset by a regrettable decline in the capital expenditure ratio by 0.6 per cent. Available data for 2012-13 suggest that these trends (in ratio terms) of falling revenues, rising revenue expenditures (especially subsidies) and declining capital expenditure have persisted through 2012-13. The recent increases in diesel prices will have limited effect in the current year. Reports of final quarter slashing of expenditures in defence and rural expenditures are unlikely to reverse these broad trends.
Against this background, to attain the pre-announced fiscal deficit target of 4.8 per cent of GDP in 2013-14, the forthcoming Budget will have to keep a tight rein on expenditures, especially subsidies. The “creeping liberalisation” of diesel prices will have to be adhered to. Something serious needs to be done to check the growth of fertiliser subsidies. Above all, the ill-designed food security Bill will have to be kept at bay. Else even limited fiscal correction will remain a chimera. On the other side of the ledger, the Budget will have to introduce measures to increase tax revenues. The guiding principle should be “do no harm”, unlike the disastrous Budget for 2012-13. With industry reeling from the past years’ regulatory and fiscal shocks, it would be best to leave the corporate tax rates alone. There is certainly scope for raising the personal income tax rate for the income bracket above Rs 15 (or 20) lakh a year by around three to five percentage points. It might be better to do this through a surcharge, simply to maintain the 16-year-old stability in the 10-20-30 percent basic rate structure. On the indirect taxes side, there is much room for increasing numerous concessional rates in excise. It would also help the movement towards uniform rates in the context of the forthcoming (hopefully soon) national goods and services tax (GST). Whether the general rate for services and Cenvat should be revised upwards by a percentage point or two from the current 12 per cent rate depends crucially on the planned structure of the GST.
All this should help engender the 4.8 per cent of GDP fiscal deficit target. This will improve macroeconomic conditions. But will it be enough to reignite investment and growth, significantly check inflation and reduce the burgeoning CAD? My guess is that it will help moderate inflation and begin the process of growth recovery. But because the damage inflicted in past years has been very heavy, recovery will be slow, leading to less than six per cent growth in 2013-14. The big unresolved macro worry is the record high CAD. There is little that this Budget can do to solve that major vulnerability in a hurry.