What the Modi government is not telling you about the economy

Hindustan Times

Budget 2016 has come amidst growing disquiet over the actual state of the Indian economy. Going by the official data, GDP grew at 7.6% in 2015-16 at the back of 7.2% growth registered in 2014-15, making India the fastest growing major economy in the world. Annual inflation, as measured by the wholesale price index (WPI), fell to 0.9% in January 2016. Such a virtuous combination of high growth and falling inflation — if truly reflective of ground realities — is unprecedented in recent economic history. Yet, several other economic indicators do not corroborate such a ‘sweet spot’.

The latest economic survey itself shows that fixed capital formation has fallen to 29.4% of GDP in 2015-16 from 30.8% in 2014-15. Agriculture has grown by merely 1.1% this year after -0.2% growth last year with food grains production stagnating at around 250 million tonnes for the past two years. Exports and imports have fallen by 17.6 and 15.5%, respectively, during this year. The Railway budget presented last week reported a mere 1% growth in freight volume in 2015-16 over last year.

Growth in bank credit has ranged between 9 to 11% in the last two years in contrast to an average annual growth of over 20% in the last decade. Banks are unwilling to lend owing to a pile up of bad debts, with stressed advances accounting for over Rs. 8.5 crore, i.e. almost 7% of GDP. The debt distress afflicting the private corporate sector is acting as a drag on fresh investments. These are certainly not the signs of a booming economy. Moreover, despite crude oil prices (Indian basket) dropping to around $30 per barrel from an average of $84 per barrel last year, annual inflation as measured by the consumer price index has remained over 5%.

The fiscal strategy adopted by the Finance Minister, however, betrays the sense of complacency pervading the policy establishment. Adherence to a conservative fiscal stance and deficit reduction has been prioritised over everything else. The total expenditure under the UPA-II government (2009-2014) averaged around 14.8% of GDP, with plan expenditure averaging at 4.5% of GDP and the fiscal deficit at 5.31% of GDP. By 2015-16, the Modi government has squeezed total expenditure in real terms to 13.2% of GDP, with plan expenditure falling to 3.5% and the fiscal deficit to 3.9%. The estimates for 2016-17 provided in Budget 2016 promises to adhere to the same contractionary roadmap, by restricting total expenditure to 13.1%, plan expenditure to 3.6% and the fiscal deficit to 3.5% of GDP.

There has been a shortfall of over Rs. 45,000 crore in direct tax collections in 2015-16 vis-a-vis the budget estimates made last year. But this shortfall has been more than made up with indirect tax collections overshooting budget estimates by over Rs. 55,000 crore, mainly on account of the hikes in excise duties on petroleum products. While crude oil prices have come down by over 54% since April 2015, the reduction of the retail price of diesel in Delhi is merely 8%.

Budget 2016 intends to take this regressive trend further, with the Finance Minister proposing to mobilise additional revenue worth Rs. 20,670 crore through indirect taxes and cesses, while foregoing Rs. 1,060 crore in direct taxes owing to the reduction in corporate tax rate and other exemptions. Such reliance on indirect taxes for revenue mobilization, especially excise duties on petro products, is fraught with risks. While it will soak up demand from the economy on the one hand, it can also start an inflationary spiral on the other if international oil prices start rising again.

Much is being made out of the thrust on agriculture and rural areas in Budget 2016. The fact is that there was a cut in the nominal outlays for agriculture and irrigation in last year’s budget by almost Rs. 5,500 crore. Given the widespread agrarian distress, the government has been forced to increase the outlays significantly this year to reverse the damage. While the outlay for agriculture and irrigation has increased from 0.19% of GDP in 2015-16 to 0.32% in 2016-17, the outlays for the social sectors (health and education), rural development and energy-infrastructure have remained at the same level in real terms as in the last two years — 1%, 0.7% and 1.5% of GDP respectively. The allocation for food subsidy has been cut in nominal terms. The much advertised improvement in the ‘quality’ of public spending in terms of a spike in capital expenditure has also got reversed in Budget 2016 — after rising from 1.57% of GDP in 2014-15 to 1.75% of GDP in 2015-16, it is estimated to fall to 1.64% in 2016-17.

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The fact that this government’s expenditure commitments in crucial areas are suspect is borne out by the 2015-16 revised estimates on crucial heads. Last year’s budget had estimated a net transfer of Rs. 8.42 lakh crore to the states as their share of taxes and central grants and loans. In effect, the net transfer to the states has fallen short by Rs. 21,443 crore. While the plan spending of the Railways for 2015-16 was estimated at Rs. 1 lakh crore last year, revised estimates suggest a shortfall of Rs. 17,800 crore.

Last year’s budget had estimated nominal GDP to grow by 11.5% in 2015-16, while it actually grew by only 8.6%. If the nominal GDP growth of 11% for 2016-17, estimated in this budget, turns out to be an over-estimate yet again, it will further dent the credibility of the government. Complacency can be quite damaging at a time when the global economy is facing a downturn and capital is flying out of the emerging economies.

Prasenjit Bose is an economist and activist

The views expressed by the author are personal