Given the scale of India’s slowing rate of growth and other economic difficulties, there was one and only metric by which the new budget presented on February 28 would and should be assessed. Had this United Progressive Alliance (UPA) government fundamentally repudiated fiscal populism because it believed that such populism was no longer electorally popular? All the signs in recent months were encouraging in this regard. Alas, the budget’s answer to that question seems to be: not really. On that litmus test, this budget has fallen short. Why so?
True, the deficit target is on a downward trajectory. But that is just a target. The headline number that stands out is overall expenditures, which are slated to rise by close to 16.5 percent. On the government’s own projection for nominal GDP (13.5 percent, which is reasonable but not conservative) this would represent a substantial increase in the expenditure-to-GDP ratio. And these are not temporary but structural increases with permanent consequences. (“Plan expenditures,” an encompassing category that includes various developmental expenditures, including infrastructure, health, and food subsidies, will see an especially sharp increase.)
To be fair to the government, this is a pre-election year when the temptations of giveaways are greater and less resistible. But these are not normal times. India is extremely vulnerable without the luxury of making do with modest responses. And at such a time, sharp increases in overall expenditures are eye-brows-raise-worthy odd.
How odd? The planned expenditure translates roughly into a real per capita increase of about 7 percent. That is roughly the rate at which expenditures per capita have been rising for more than a decade now, so the budget does not seriously reverse that trend. The failure to do so at a time of fragile finances is striking. The budget continues a trend that would make Indians feel entitled well before India becomes rich.
The government claims that higher expenditures will be more than financed, so that the overall deficit will come down. But here a few points are worth making. The first relates to the realism of the planned revenue measures (a combination of taxes on the very rich and some indirect tax increases). If GDP growth underperforms, or oil prices rise, or the exchange rate does not strengthen, targets will prove elusive. The second relates to the realism of the expenditure numbers: This year’s deficit target has been met thanks to sharp compressions in expenditures. Might some of the compression merely be postponement?
Perhaps most important, even if next year’s budget targets are met, the government has set itself a much more difficult task for the medium-term by the structural increases in expenditures. Note that the bulk of the revenue increases are one-off, so that beyond this budget, structural tax increases, such as the new goods and services tax (GST), will have to carry the extra load of financing these new increases in order to keep the medium-term deficit target sustainable. To the extent that capital expenditures are rising, they could raise growth and hence not create medium-term sustainability issues. But in India, the iffy quality of such spending and the leakages involved should make one cautious about its growth-enhancing potential.
In a very crude sense this budget is classically populist: soak the rich to pay for more redistribution. But that is not why it has fallen short: More taxes on the rich may well be warranted and addressing redistribution in India remains pressing.
This budget has fallen short in continuing the rapid buildup of expenditures, of a durable nature, at a time when economic circumstances warrant the opposite. This budget has fallen short in not moving away enough from the old assumptions of Indian political economy. The last few months seemed to suggest that prudence, not populism, would be not just good economics but also good politics. It may turn out that the last few months fluttered only for this budget to deceive.