In terms of vision and policy, whether the Budget conforms to the message in the Economic Survey of decisive shifts in some areas with a persistent and creative incrementalism in others will be grist for the punditry mill in the days and weeks ahead. There is another dimension along which the Budget must be assessed: macroeconomic and fiscal policy.
Fiscal discipline in 2014-15: Despite the weaker-than-anticipated growth in nominal GDP and the over-optimism on buoyancy, and despite having to follow pro-cyclical fiscal policy, the government will meet its fiscal deficit target of 4.1 per cent of GDP. Massive cuts in expenditure were required to do so, demonstrating the commitment to fiscal discipline (and the discipline in meeting commitments)..
Fiscal targets for 2015-16 and beyond: The Economic Survey had called for adherence to the medium term target of 3 per cent, which the Budget has followed. This target has been delayed by an extra year, with a corresponding change in the 2015-16 target to 3.9 per cent relative to market expectation of 3.6 per cent. How should this be evaluated?
First, the Survey had argued that the 2015-16 target should take account of the fact that macro-economic pressures had abated, that India was still a recovering economy which would weaken the case for pro-cyclical policy, and that investment was needed to be boosted to revive growth. These factors qualified the desirability of moving to the 3.6 per cent “target” speedily. Adopting the recommendations of the 14th Finance Commission limited the ability to do so. Thus, the target of 3.9 per cent represents a good balance between the competing claims on fiscal resources.
One broad way to look at the Budget arithmetic is this: the savings on subsidies amounted to about 0.35 per cent of GDP; the additional revenue from disinvestment is about 0.3 per cent of GDP. These gains were used essentially to finance the reduction in the deficit (0.2 per cent of GDP) and additional capital expenditure of 0.3 per cent of GDP. The 14th Finance Commission recommendations squeezed the fiscal envelope by between 0.3 and 0.4 per cent of GDP. Without this squeeze, a combination of accelerated fiscal consolidation and higher capital expenditures could have been achieved.
On the quality of fiscal adjustment, the Survey argued strongly that progress toward the medium target should be based on expenditure compression and expenditure control. Even discounting the gains in subsidies (which largely reflect the oil price decline), the Budget has adhered to these suggestions. Non-subsidy revenue expenditure was reduced by close to 0.55 per cent of GDP. And capital expenditures were increased by close to 0.3 per cent of GDP, perhaps less than the economy needed but in line with what the fiscal envelope allowed. So, a desirable switching away from public consumption toward investment was secured.
A consolidated perspective: Perhaps the least appreciated but very important implication of the Finance Commission recommendations is perspective. In 2015-16, about 62 per cent of total tax revenues collected by the country (Centre plus states) will accrue to the states compared with about 55 per cent in 2014-15. This is a radical development. It is now absolutely imperative that Indian public finances be assessed at the consolidated level rather than at the central level alone.
And here the picture could well be different. If the extra revenue accruing to the states is spent in the manner of the most recent year, it is likely that the consolidated fiscal deficit would be reduced by between 0.2 and 0.6 per cent of GDP and the revenue deficit would decline by about 0.4 per cent of GDP. Further, consolidated capital expenditures would increase by between 0.3 and 0.6 per cent of GDP. In other words, fiscal consolidation, expenditure control, and the quality of fiscal adjustment would all be: better than those at the level of the central government and close to market expectations of central government fiscal targets.
These fiscal developments combined with the agreement with the Reserve Bank of India on a Monetary Policy Framework mean that from a macro-economic and fiscal perspective, the Budget for 2015-16 would preserve macro-economic stability, move the economy toward the medium term fiscal target, while also providing the short term impetus to what is still a recovering, not surging, economy.