In
Feb 2009, then External Affair
Minister - Mr Pranab
Mukherjee, had announced the
Pre-Election Interim Budget 2009
for the Fiscal 2009-10. He has
announced nothing except
appraising his Govt’s
performance over the last 5 years.
Markets and the corporate world
had anticipated lot of changes
and reframing of policies to
weather the current global
economic downturn however, the
Interim Budget has banished all
the factors to support the
Indian economy.
In his budget speech, he merely stressed upon the Rural Development by expanding the Rural Infrastructure Development Fund (RIDF) from Rs. 5,500 Crores ($1.13 Billion) for the year 2003-04 to Rs14,000 Crores ($2.87 Billion) for the year 2008-09. Apart from that, he has discussed, exactly what the UPA Govt have did in the last 5 years of their tenure. On the most important Financial and Tax reforms front, he has left this portion for the Regular Budget announcement. He said the, tax rates must fall in these stressful economic times, while the majority of industry has expected positive changes on the tax front and the ailing Real Estate and Infrastructure sectors had anticipated for support from the Government.
India’s Finances
Since the last Year’s Budget announcement, the Indian Govt’s finances have totally shaken up. Three major developments like provision for pay revision (Sixth Pay Commission), loan waiver and finally National Rural Employment Guarantee Act (NREGA) and various other subsidies has led to significant intensification of the India’s Fiscal Deficit. Initially, Govt had pegged it at 2.1% of the India’s GDP. This Fiscal Deficit has to be rise for sure as the Govt has announced two different Stimulus Packages in the last couple of months to stimulate the economy and the domestic demand, extra spending under NREGA, Subsidy on Oil and Fertilisers and most importantly the lower revenue/receipt from Taxes. Government is also expecting lower tax revenue in this fiscal year due to global economic downturn. The abstract of “Demand for Grant” is given below:
- Pay & Pension Revision: Rs. 28,505 Crores ($5.85 Billion)
- Oil Subsidy (Oil Bonds): Rs. 65,942 Crores ($13.54 Billion)
- Fertilizer Subsidy (incl Bonds): Rs. 64,866 Crores ($13.32 Billion)
- Food Subsidy: Rs. 11471 Crores ($2.36 Billion)
- NREGA: Rs. 25,000 Crores ($5.13 Billion)
- Farmer’s Debt Relief: Rs. 15,000 Crores($3.08 Billion)
- Transfer to States: Rs. 12,741 Crores ($2.61 Billion)
The total cost of those subsidies (including bonds) and other packages is Rs. 223,525 Crores ($45.9 Billion) which means, the it works out to 4.4% of the India’s GDP. If the Govt adds the reduction in tax collections, it could cost 1 per cent of GDP. According to the Economic Advisory Council (EAC), the Fiscal Deficit in the Union Budget had been placed at 2.5% to which, the addition of 4.4% and 1% to this number would definitely raise the total to nearly 8% of the GDP.
What would happen, if the Fiscal Deficit rises? It means, that the Government will borrow extra to finance their expenditures (planned or non-planned). We won’t evade the higher monetary inflation. If the Government borrows extra for its spending, then the level of money supply will rise because it will force the Reserve Bank of India (RBI) to print more money - which would lead to the higher inflation at least in the medium term. Currently, the India’s national debt is 59% of the annual gross domestic product (Central and State Government combined). At VMW, we have earlier discussed about the deflation in the Developed Economy, however we’ve ruled out the Headline Deflation in India. Maybe the short term, Government borrowing will prevent the further fall in inflation. There is also a possibility of higher interest rates in the long run.
As a result, there is a limited room for the Government to ramp up the spending without causing the structural harm to the economy. That’s why the Government is reluctant to cut tax rates and in the near future, Government may also consider reducing subsidy burden on Oil and Fertiliser by 1.6% of the GDP and this Interim Budget proves merely a performance review of the Government. Now all eye on the RBI’s meeting. RBI likely to cut interest rates by 50 bps to 100 bps to prop-up the economy as the Government has admitted that the worst is yet to come and the painful time ahead.
Please Note: All figures in US Dollar (USD) terms are converted at Indian Rupee (INR) 48.70 aganist the USD.