New Delhi: On the day when Finance Minister P Chidambaram unveiled his seventh budget – and his fifth for the UPA government – he left everybody stunned with a Rs 60,000 crores waiver of loans for small and marginal farmers.
This has left open two huge questions – where is the money coming from, and if this year’s Budget is an attempt to get re-elected.
Discussing the issue with Network 18’s Managing Director Raghav Bahl were senior CPI-M leader Sitaram Yechury; Deputy Chairman of the Planning Commission, Dr Montek Singh Ahluwalia, who is also a key architect of the UPA government’s economic policies; and former finance minister and senior Opposition leader Yashwant Sinha.
Chidu may have won over many with his Budget, but the UPA’s chief ally, the CPI-M, is still not giving the ruling Congress party any quarter. Though the UPA government transferred Rs 16,000 crores under the NREGS and waived off Rs 60,000 crores worth of loans – both which the CPI-M had demanded – the party is still critical of its ally.
“I’ll only say they’ve not gone all the way,” said Sitaram Yechury. “That is a pity because they had this opportunity to redeem the pledges they’ve made in the Common Minimum Programme, and I think they’ve had a very favourable situation and they could have gone farther than they’ve gone.”
Addressing concerns that the Rs 60,000 crore loan-waiver could dislocate the gradually improving fiscal situation and the FM might end up breaching his own FRBM targets of three per cent, Yechury said that Chidambaram has insured himself well.
“I think he has got enough margins here, and if you notice, even in this Budget, his revenue of surpluses is to the tune of roughly 18 per cent. But then, his capital expenditure is going to grow only by about 8.8 per cent. He has done enough cushioning for meeting the adjusted targets.”
And that, Yechury added, was the complaint of the CPI-M.
“Concern about deficit in a situation of revenue buoyancy is not good economics,” he stated.
Montek Singh Ahluwalia, too, felt the loan waiver can be handled in a prudent manner.
“First of all, the Budget deficit that’s actually in the papers as they stand at the moment, is only 2.5 per cent of the GDP whereas the FM’s target was much higher, that is, 3 per cent,” he explained.
Ahluwalia also pointed to the revenue buoyancy witnessed in the past two or three years.
“Without raising tax rates, the Finance Minister and the Income Tax department in particular have actually succeeded in generating tremendous buoyancy in revenue,” he observed.
The point was then raised that though the fiscal deficit is said to be 2.5 per cent, thanks to many items – such as oil bonds, FCI bonds, loan waiver bonds, among others – being off the balance sheet, the fiscal deficit amounts to almost seven per cent of the GDP, one of the largest in the world for an economy this size.
Ahluwalia assured that it would not come to that and said that the Budget is actually very conservative on the projected revenue growth. He reiterated his assurance that the FM had enough headroom to accommodate all those items left off the table.
“If you just look at what has happened in the current year – 2007-2008 – the RE estimates of revenue are much above budget estimates, and I would expect next year also, given that the tax reforms, the tax compliance is continuing and given that we expect continued and strong growth in the economy, I think the FM will find that more revenues would come in than has been put in the Budget,” he said.
“We’ve got a strong increase in planned expenditure and I think that increase gives a very good stimulus to the sort of inclusive growth programmes we (the Planning Commission) have been talking about,” he said.
Yashwant Sinha, however, did not share this complacency and felt the threat of fiscal dislocation is real. Sinha drew attention to the fact that Chidambaram has postponed the targets of fiscal deficits twice.
“He first postponed it in the very first year of his tenure and now this year he has postponed it again. Revenue deficit should have been zero in next year’s budget – that continues to be one per cent,” Sinha stated.
He went on to add that Chidambaram had not included the farmer loan waiver in his calculations and nor had he included the sixth Pay Commission’s recommendations.
“To say that we are on a fiscally correct course is something which I am unable to accept,” he declared.
Slowing or slowing down?
The fact that the FM has not given any figures but has only said that he has a 0.5 per cent headroom has not won over Yashwant Sinha.
“I’ll not buy it,” he said. “The economy is in a slowdown phase and it’ll be difficult to continue the same growth rate in the taxes.”
“We have already seen a deceleration in central excise revenues. That income tax or direct taxes will continue to grow at 40 per cent and above is difficult to sustain in an economy which is in a slowdown phase,” he pointed out.
Sitaram Yechury appeared to concede Sinha’s point that the economy was in a slowdown phase.
"Revenue buoyancy may not be 40 per cent, but for the last 5 years, Mr Chidambaram has been having a buoyancy rate of roughly 30 per cent a year every year,” he said.
Yechury did not agree with Yashwant Sinha’s doubts.
“As far as the Pay Commission is concerned, how can any Finance Minister give a pre-emptive allocation before the recommendation has come in?” he demanded. “All you can do is provide yourself with the margins. I think that has been done.”
For your interest
The matter of rigidly high interest rates was raised. With the real interest rates running at over seven percentage points, they are among the highest in the world. Such interest rates would negatively impact economic growth.
The reason they remain high is that the fiscal deficit does not come down but continues to strain at the levels. The government’s stance on controlling inflation also builds up a case for such rates.
Montek Singh Ahluwalia did not think that the fiscal deficit would go out of control.
“You know, I don’t think you should worry about the fiscal deficit getting out of control. Some of the numbers I have heard you talk about – double digit fiscal deficits – that’s simply nowhere on the cards. The only issue really is – there is a target of three per cent, the FM has half a per cent of headroom, anyway, and I feel that he has more than that, because I am pretty sure that the revenues will do better than what the budget estimates have said,” he stated.
Rate the sop
On being asked his rating of the Budget on a scale of 10, Ahluwalia said, “I rate it as a very good budget. I think, given the circumstances of the economy, the FM has done an excellent job.”
Sitaram Yechury’s final word on the Budget remained that the FM could have done better.
“The approach has been very positive but I think the full potential of the Budget has not been utilised. Allocations for education, health, agriculture, social sectors could have been higher,” he said.
Yashwant Sinha refused to appreciate the Budget and in a non-committal way, said, “There may be some positive things about the Budget.”
He warned, however, that the Budget may not help the UPA electorally.
“Any government which, in the past, has attempted to give out sops to the people in the last year of its office, whether in the economic field or in the social field, has not succeeded. The Indian voter is far cleverer,” he said.