Achieving the impossible, thrice
By any yardstick, UPA 2’s performance has been the worst ever for India, and the worst among most comparable countries in the world. It takes a lot of “talent” to do the following: One, increase the inflation rate from 5 to more than 10 per cent in the short space of three years. And to keep it sustained at double-digit levels for four consecutive years. No other country has been able to achieve this feat. Two, decelerate growth by a full 5 percentage points in the short space of two years, 2010-11 to 2012-13. No other country in the world, with the possible exception of Greece, has been able to achieve this decline. Actually, I lie — even Greece does better than UPA 2 India. GDP growth in Greece was -3.5 per cent in 2010 and is estimated to be -6 per cent in 2012, a decline only half that of India. Three, considerable worsening of the current account deficit — estimated to be close to 5 per cent of the GDP in fiscal year 2013-14, a decline of 3 percentage points since 2009. Incidentally, Greece shows an improvement of 4 percentage points in its current account deficit to a level close to -6 per cent of the GDP, not that far from India.
This was the background against which P. Chidambaram presented the budget for 2013-14. If you were the finance minister, wouldn’t you recognise that there was a dire need to reform? Yes, I thought so too. Hence, given the extremely sorry state of affairs of UPA 2’s Indian economy, it was expected that one of the leading reformers in India, PC, would present a reformist budget. Indeed, the first two minutes of his budget speech indicated that he was ready to put India back on track. But that was to prove illusory, and depressingly so. The FM proceeded to present one of the most anti-reform budgets in recent times. This is where UPA 2 achieved the impossible for three years in a row — something even Don Quixote would not dare attempt. The first impossibility was the devastation of the Indian economy in such a short period of time. The second impossibility was the retrograde budget presented by Chidambaram’s predecessor, Pranab Mukherjee. The third impossibility is for a reformer to present an anti-reform budget. It appears as if PC has been made to pay for his reformer image. In all honesty, I do not see this as a PC budget; one can only speculate on the pressures he must be working under.
The most important objective of PC, in his own words over the last several months, was to prevent a ratings downgrade. Has he been able to achieve this target? Let us look at some basic numbers. A significant part of the runaway fiscal deficit (and associated current account deficit) has been caused by government expenditures getting out of hand. So what does UPA 2’s final budget propose? An expenditure growth of 16.3 per cent, and much, much higher than its estimate of nominal GDP growth of only 10.8 per cent! That is, far from enforcing a decline in the growth rate of expenditures, UPA 2 has actually significantly increased the expenditure to GDP ratio from 14.0 percent to 14.7 per cent! But there is a decline in the fiscal deficit, so all must be OK? Yes, according to the calculations of UPA 2. Tax revenue is projected to gallop by a voodoo 19 per cent with a GDP increase of only 10.8 per cent. Such a swelling is most unlikely, given the slow growth of the Indian economy, and likely to be made slower still by the tax increases announced in the budget.
Note that the numbers pertain to revenue from taxes, and exclude any revenue that might be gained from selling the family silver, which may turn into the family bronze after UPA 2 is done with the Indian economy. Perhaps the increase in the super-rich tax will add a lot of revenue. Chidambaram has proposed a surcharge of 10 per cent on the 42,800 individuals who earn more than Rs 1 crore. Assume for a moment that the average income of these individuals is an upper bound Rs 1.2 crore on which they pay an upper bound 30 per cent of taxes. Tax revenue from these individuals before the surcharge: 36 lakh times 0.428 lakh, or Rs 15,400 crore. Assuming full compliance, a 10 per cent surcharge will yield an extra Rs 1.54 thousand crore. Total tax revenue is scheduled to increase by Rs 1,98,000 crore. The surcharge will yield less than 0.8 per cent of the revenue increase and will yield less than half the projected increase in UPA 2’s flagship in-the-name-of-the-poor corruption programme, MGNREGA. Corruption because more than half of the beneficiaries are in the top third of the consumption distribution in India, at least according to the detailed questions on MGNREGA in the 2009-10 NSS survey on employment. Of course, it is possible that all of this corrupt leakage has been eliminated by now. Possible, but not likely.
I am afraid the talk will soon turn to the credibility of the growth numbers projected in the budget. The first three quarters have grown at an average 5 per cent rate. The GDP for the whole year is likely to be less than 4.8 per cent, which will make the 2012-13 growth rate to be the fifth lowest in the last 20 years! If you believe UPA 2’s growth and tax projections embedded in Chidambaram’s budget for 2013-14, I have some used cars, a bridge, and snake oil for you to buy.
The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Blufin, a leading financial information company