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Resource centre on India's rural distress
 
 

Hope trumps realism-Paranjoy Guha Thakurta
-The Asian Age

Sonia Gandhi’s economic and political ideology may have apparently triumphed over that of Manmohan Singh. The neo-liberal finance minister Palaniappan Chidambaram may be conveying an impression that he’s turned socialist with a vengeance by increasing taxes on the rich in the run-up to the 16th general elections.

But the truth is that Mr Chidambaram has made certain assumptions about subsidies, inflation and the expected growth of gross domestic product (GDP) in his Budget that indicate that he is either excessively optimistic — perhaps unrealistically so — or that he is just not serious about controlling prices. Nevertheless, he is convinced that his Budget makes for good politics as well as good economics.
 
In the opinion of this writer, the last full-fledged Budget of the second UPA government has placed hope way above realism. The problem with trying to please everybody (expect the rich who really do not matter in electoral terms) is that Mr Chidambaram could end up spreading the happiness so thinly that he ends up pleasing nobody. This is the real and present danger in the Budget. By projecting an overly rosy future of the economy over the next year, Mr Chidambaram may end up getting his numbers as wrong as his predecessor, the President of India Pranab Mukherjee, did a year ago.
 
The Budget has made an underlying assumption that the country’s GDP will grow by 13.4 per cent in nominal terms over the next financial year that ends on March 31, 2014. On Wednesday, the chief economic adviser Raghuram Rajan stated that the government was expecting GDP to grow by somewhere between 6.1 per cent and 6.7 per cent during 2013-14 against five per cent in the current financial year. This implies that the government has implicitly assumed an annual rate of inflation as measured by the official wholesale price index (WPI) of between 6.7 per cent and 7.3 per cent during the coming financial year. This level of the WPI is where we are at present although the consumer price indices and food inflation are above double digits. Does this mean that the government does not expect inflation to come down over the next 12 months? Perhaps. Why?
 
Consider first the proposed expenditure on subsidies on petroleum products, namely, diesel, kerosene and cooking gas. The revised estimate (RE) for 2012-13 at Rs. 96,880 crore is nearly Rs. 32,000 crore higher than the Budget estimate (BE) for 2013-14, which is Rs. 65,000 crore and lower than the actual figure for 2011-12 which was Rs. 68,484 crore. When questioned by journalists, Mr Chidambaram claimed his numbers are “credible” (because the number of cooking gas cylinders per household per annum has been capped at nine), but are they really? Is he not assuming that world crude prices will not go up? More importantly, if he believes that diesel prices will indeed creep up over the coming months, will he be able to contain inflation at the levels suggested? Sorry Mr Finance Minister, this writer is not convinced.
 
Now comes the figure of total subsidies on fertilisers which are expected to remain more or less constant at around Rs. 65,970 crore. Once again, with all due respect to Mr Chidambaram, it requires an incorrigible optimist to believe his prognostications will be proved correct. By the time, we will get to know the actual situation, a vote on account would have to be presented and general elections will be on us.
 
As for the projected subsidies on food, the total amount is slated to rise from Rs. 85,000 crore (RE for 2012-13) to Rs. 90,000 crore (BE for 2013-14), or a rise of only Rs. 5,000 crore after taking on account the extra provision of Rs. 10,000 crore made by Mr Chidambaram in anticipation of the enactment of a new law ensuring food security. Put differently, the food subsidy bill is supposed to come down by Rs. 5,000 crore assuming no new law on food security. Mr Chidambaram says he cannot anticipate what the additional outlay on food subsidies will be because of the proposed new law until the bill comes before the Cabinet. He adds that “if required”, more money will be provided for food subsidies.
 
Does Mr Chidambaram believe that there will be no further hikes in the minimum support prices given to farmers for purchase of foodgrains, which have a direct bearing on food subsidies? Does he also believe that there will be no extra outgo on food subsidies because of higher transport costs (because of higher diesel prices) incurred by the Food Corporation of India? On the whole, the total subsidy bill on the three “Fs” — fuel, fertiliser and food — is to come down by nearly Rs. 27,000 crore, to be precise by Rs. 26,882 crore from Rs. 2,47,854 crore to Rs. 2,20,972 crore.
 
Total plan expenditure (both revenue and capital) is expected to come crashing down this financial year by as much as Rs. 1,01,838 crore from Rs. 5,21,025 crore (BE) to Rs. 4,29,187 crore, but Mr Chidambaram dismissed this saying, “what has been done has been done” and asked us to look ahead to the coming year when he hopes investor sentiments will revive. On service tax collections, Mr Chidambaram expects a rise of over 35 per cent thanks presumably to the proposed new “voluntary compliance encouragement scheme”. By way of contrast, total tax collections are slated to go up but will remain under 20 per cent.
 
Budgets in India are much more than a bland statement of accounts of the country. It is as much a pronouncement on the political economy and the future directions of the government’s policies. Wish you best of luck, Mr Finance Minister. You will certainly need it.

The writer is an educator and commentator