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BW Businessworld

A Far-Fetched Budget

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In my last article, urgently penned in the afternoon of Budget Day, I described it as an unambitious and possibly doable budget, with some utterly horrible retrospective tax amendments. My upset with those amendments remain. And the more I go through the minutiae of Budget 2012-13, the less I think of it. My objections are not about "why didn't Pranab Mukherjee announce a slew of major reforms?" — a common sentiment that has been doing the rounds since 16 March. I did not expect a man seriously hamstrung by the worst of coalition politics and belonging to a party that got drubbed in Uttar Pradesh, Punjab and Goa to present a budget unfurling long-awaited reforms with the flourish of trumpets and roll of drums. My overpowering disenchantment has to do with a single word: credibility. Credible means convincing, believable, dependable and reliable. This budget is not credible. Not by far.

Let's start with the record for 2011-12, and compare budget estimates (BE) with revised estimates (RE). Take disinvestment. Pranabbabu had set a modest target of Rs 40,000 crore. Easily achievable if the machinery had got into motion in time. But it did not. The people who matter suddenly woke up towards the end of the third quarter of the fiscal year with an "OMG! We got to get Rs 40,000 crore. What do we do?" In an utterly hasty, unplanned, unconvincing way, the babus corralled ONGC for a 5 per cent stake sale. They also told the lead managers how to run their business, and at what price point to make the offer. Then, at the eleventh hour and 59th minute, as the issue was failing miserably, they bullied the finance ministry's cashier of last resort, the Life Insurance Corporation, to subscribe. So, versus a BE of Rs 40,000 crore, the RE was Rs 15,493 crore. No credibility.

Now look at major subsidies. The BE on account of food subsidies was Rs 60,573 crore. The RE was 20 per cent more, at Rs 72,823 crore. The BE on fertiliser subsidies was Rs 49,998. It was overshot by 34 per cent to Rs 67,199 crore. The petroleum subsidy was budgeted at Rs 23,640 crore —Lord knows why, because by the second half of February 2011, crude was reigning at above $100 per barrel. The RE was almost three times of that — Rs 68,481 crore. Where is the credibility?

On to fiscal deficit. The BE was Rs 4,12,817 crore or 4.6 per cent of GDP. It was overshot by a hefty 26 per cent, or another Rs 1,09,163 crore. To put it in perspective, the extra fiscal deficit alone could have given almost 91 million poor people cash for 100 days of work at Rs 120 per day!

Has this huge deficit helped raise public sector or public-private investment? No. Total capital expenditure under plan and non-plan heads has, in fact, fallen by 2 per cent from a BE of Rs 1,60,567 crore to an RE of Rs 1,56,780 crore. Instead, it has gone to finance consumption: food, fertiliser and petroleum subsidies; interest subsidies; wage and salary payments; and grants to state governments and union territories. Consequently, India's gross fixed capital formation has fallen from 35 per cent of GDP — itself inadequate to support 9 per cent growth — to 30 per cent. No credibility worth its name.

Given this scenario for RE 2011-12, why should we believe the BE for 2012-13? Consider some numbers. The food subsidy is budgeted at Rs 75,000 crore — a mere Rs 2,177 crore above 2011-12 RE. When the Food Security Bill is enacted this year, it will raise the subsidy by at least 0.3 per cent of GDP, if not 0.4 per cent, in its first year. That is an additional burden of Rs 30,000 crore to Rs 40,000 crore. Where does that figure in the BE for 2012-13?

Consider petroleum subsidy. Crude oil is now ruling at $122 per barrel. There is a high probability of an international crisis developing around Iran. How, then, does Pranabbabu budget for the petroleum subsidy to come down from the RE of Rs 68,481 crore in 2011-12 to a BE of Rs 43,580 crore? He cannot cut either the diesel or kerosene subsidy in any significant way. How then can he meet this target? Similarly, with fertilisers, where the subsidy is bound to rise with an increase in the price of naphtha. To say that the Aadhaar scheme will fix this is wishful thinking. It won't, because this government cannot stomach the politics of cutting subsidies.

No credibility. So, I don't believe the fiscal deficit numbers projected by Pranabbabu. It will overshoot the 2012-13 BE of Rs 5,13,590 crore by at least 10 per cent — or by over Rs 51,000 crore. Maybe more. It does not matter. For nothing is believable in this government. Least of all a Union Budget. Incredible, isn't it?

The author is chairman of CERG Advisory. omkar(dot)goswami(at)cergindia(dot)com

(This story was published in Businessworld Issue Dated 09-04-2012)