The first budget of the Narendra Modi government, in its core thrust, represents continuity with the UPA-2 government's economic policy. In fact, Arun Jaitley's budget presents nothing innovative at all in the way it intends to deal with the challenges of low growth, high inflation and the persistence of socio-economic backwardness. His is a fall back on the old and failed strategy: contain fiscal policy, hope that it would pull down interest rates and encourage private investment, and place emphasis on foreign capital inflows to revive growth.
In his speech, Jaitley did not hide his awe for his predecessor with regard to fiscal consolidation. After stating that P. Chidambaram had set a “very difficult task” of cutting fiscal deficit to 4.1 per cent in 2014-15, Jaitley put forward his own road map for the next three years. Between 2013-14 and 2016-17, the fiscal deficit is to fall from 4.6 per cent to 3 per cent; and the revenue deficit is to fall from 3.3 per cent to 1.6 per cent. Such fiscal consolidation is to take place with no comparable rise in revenues, which would have been a progressive and expenditure-neutral road map. Gross tax revenue is targeted to rise only moderately from 10.2 per cent in 2013-14 to 11.2 per cent in 2016-17. In other words, Jaitley's fiscal consolidation path would be marked by sharp expenditure compression till 2016-17.
Expenditure cuts had begun during the last two years of the UPA-2 government itself. Between 2012-13 and 2013-14, the tax to GDP ratio fell from 10.2 per cent to 10.0 per cent, mainly on account of a fall in central excise collections by Rs 6,376 crore. The UPA-2 government also gave significant tax concessions to the corporates and the rich. If Rs 566,234 crore was the total revenue foregone in 2012-13, the total revenue foregone in 2013-14 was higher at Rs 572,924 crore. To cover for the losses in revenue, Chidambaram cut expenditures across the board; for 2013-14, the revised estimates on a variety of expenditure heads are lower than the budgeted estimates. He also aimed to disinvest heavily to open a regular channel that would fund public spending. In 2013-14, Chidambaram raised Rs 21,992 crore from disinvestment proceeds. However, in an election year, there were limits to disinvestment.
Jaitley's promise is to pick up the threads from where Chidambaram left. First, for 2014-15, Jaitley has promised an intensive disinvestment policy to raise non-debt generating revenues, and is hoping to raise Rs 55,000 crore in 2015-16 and 2016-17. In the public banking sector, Jaitley has opened the doors of a “creeping privatisation” policy by allowing them sale of shares to raise their capital requirements. Thus, the Modi government wants to step up the privatisation policy of the UPA-2 government to a totally new plane. Secondly, Jaitley also wishes to continue the go-slow policy on the question of charging retrospective taxes on corporate houses. By all accounts, he has assured them of a soft scrutiny mechanism by the CBDT before any action. Thirdly, Jaitley has signalled that he would continue compressing expenditures to bolster his road map for fiscal consolidation.
In the social and economic sectors, expenditure compression is likely to be acute in 2014-15. While the Modi government has kept most central schemes intact, the allocations to these schemes have either fallen or are stagnant. In the National Rural Livelihood Mission (NRLM), if the expenditure in 2013-14 was Rs 2371.30 crore, the budgeted allocation for 2014-15 is only marginally higher at Rs 2486 crore. The budget for the National Rural Empployment Guarantee Scheme has risen by just Rs 364 crore: from Rs 33,000 crore in 2013-14 to Rs 33,364 crore in 2014-15.
In addition, Jaitley has promised that subsidies would be “more targeted”. Targeting of subsidies is always a code for expenditure cuts. While the food subsidy is to rise by about Rs 23,000 crore, thanks to an entitlement-based Act, other subsidies are to be limited. For instance, petroleum subsidy is to fall from Rs 85,480 crore in 2013-14 to Rs 63,427 crore in 2014-15: a decline of Rs 22,053 crore. Fertiliser subsidy is to rise only marginally by Rs 4999 crore, from Rs 67,971 crore in 2013-14 to Rs 72,970 crore in 2014-15. Within fertilisers, there appears to be a rise in urea subsidy and a fall in subsidies for potash (K) and phosphoric (P) fertilisers. Between 2013-14 and 2014-15, while the overall fertiliser subsidy is to rise by Rs 4,999 crore, subsidy on urea is to rise by Rs 9,500 crore and the subsidy on decontrolled fertilisers is to fall by Rs 4,757 crore. Such a policy is likely to increase the relative prices of P and K fertilisers compared to urea, and lead to further imbalances in the N:P:K application ratio by farmers.
Finally, if Chidambaram focussed all his energies on inviting foreign capital to boost economic growth, Jaitley has promised not to be left behind. He has increased the cap of FDI in the defense sector from 26 per cent to 49 per cent. The FDI cap in the insurance sector has also been increased from 26 per cent to 49 per cent. FDI is also sought to be given a major share of the pie in the highly speculative real-estate sector. In the name of developing Smart Cities, the requirement of the built-up area for FDI has been reduced from 50,000 square metres to 20,000 square metres. The capital conditions for FDI in this sector has also been reduced from USD 10 million to USD 5 million.
In sum, the first budget of the Modi government could also be billed as the possible first budget of a UPA-3 government. In my analysis of the UPA's last full budget in the Asian Age, dated 1st March 2013, I had argued that Chidambaram's was “a poll calculation gone wrong”. The UPA was taught a harsh lesson by India's people in May 2014. The Modi government, once in power, seems intent on treading the same path. It is just a reaffirmation that there are no differences at all between the economic policies of the UPA and the NDA.