How Will India Pay for the Perks in the New Budget

Mukesh Gupta/ReutersA shopkeeper counting Indian currency notes at his shop in Jammu city, Jammu and Kashmir.

Characteristic of a party headed for the polls, the Congress party’s budget Thursday morning had a lengthy list of handouts from increased spending on healthcare, education, rural and tribal welfare to a tax benefit for first-time home buyers and women’s development funds. Yet with all the additional spending adding up to a staggering 2.3 trillion rupees (about $42 billion), the minister projects that the country’s closely-watched fiscal deficit will be reined to 4.8 percent in 2013-14.

While appearing fiscally balanced, the question is ow exactly does P. Chidambaram, the finance minister, plan to pay for it all

Sure, he proposed tax increases on the rich, increased corporation tax and pared-down subsidies, but these sums add up to a paltry 450 billion rupees (about $8 billion) in contrast with his requirements of 2.3 trillion rupees in the coming year. Instead, he expects to make up the difference from non-tax sources, including the sale of telecommunication spectrum. This, he calculates, will add 1.7 trillion rupees (about $31 billion) to government coffers, which balances the budget. But in the current economic environment the minister’s expectations of non-tax revenues seem optimistic and difficult to achieve.

The government’s expects 408 billion rupees (about $7 billion) from sales of telecom spectrum while sales of shares from public-sector companies are expected to add 400 billion rupees to its coffers. These contribute just under half to the required total, but the investment clim! ate is tough and these figures seem hopeful.

Take for the instance, the lackluster sale of telecom spectrum just last week. After cancelling licenses following a corruption investigation into the sector, the government had hoped to raise 582 billion rupees (about $10 billion) from sales of telecoms spectrum sales in the budget last year. These have been revised downward markedly this year; it now expects to get only 194 billion rupees (about $3.5 billion) this year, a third of the figure it originally expected to receive. Today, the marketplace for such sales is tougher, which is likely to put a dent in government’s plans to raise money.

Moreover, the government’s projected growth figures, released on Tuesday in the economic survey, show overly optimistic revenues ahead. A growth of 6.1-6.7 per cent is more than a full percentage point over this year’s growth, thereby buttressing the numbers of tax and non-tax revenues, making fiscal consolidation elusive.

Whether growth can really pck up depends on a rise in the rate of savings and investment. The middle classes might benefit from a lower inflation rate, but in a difficult financial environment disposable incomes will remain strained until investment picks up. As for investments, the budget has not instilled a sense of confidence in many investors, yet it has not rocked their faith either. The markets seem to have grudgingly accepted the pre-election profligacy, but the environment may not improve considerably in the coming few months. Mr. Chidambaram’s optimistic growth numbers have only given analysts a pause for thought, but not caused a much-feared downgrade of the country’s credit rating.

India has made improvements in the fiscal deficit this year, Standard & Poor’s said in a note to investors issued Thursday, which said ratings will remain unchanged. Still, the note said, “there is little progress in structural reforms to reduce the vulnerability of the government’s fiscal position.”

India remains ! vulnerabl! e to spikes in oil and commodity prices, the rating agency said, and although the budget contains measures aimed at encouraging infrastructure projects, the effectiveness of attracting “much-needed investment is uncertain at this stage.”

Still, the finance minister has managed to pull a feat of balancing the books while pleasing rural vote banks and financial sector pundits in his last budget before the elections early next year. Like his predecessor, he managed to dodge the important questions of retrospective taxation and further financial sector reforms. The Congress Party rested its hope of economic salvation and electoral gains of the kind he delivered before 2009 and led to the election victory. So far, it seems he might have succeeded on the first, on the second it remains to be seen.

The author is a Research Associate at the Indian Council for Research on International Economic Relations. The views expressed are her own, not the organization’s.