THE BUDGETS in India only addresses the short-run marginal issues relating to income and expenditure accounts and the expansion and liberalisation of the private sector in the context of globalisation. They don’t focus on basic long-run issues with seriousness. In fact, it is not only a question of fiscal and monetary matters, but also a question of the whole gamut of economic issues facing the country.
In order to be effective, the forthcoming budget, apart from other aspects, has to be an important link between the past and the future and must, therefore, address, apart from income and expenditure accounts and related marginal issues, the long-run objectives and issues of economic and social importance for the country as a whole. Neglect of the long-run issues will increasingly show up in disappointments even in the short-run. Long-run ‘demand-side’ issues like high inflation or unsustainable current account or fiscal deficits and imbalances in the balance of payments work against macro economic stability, which, in fact, is a highly serious matter for the whole economy, especially in recent times when the whole world is hit by recession and works against the whole ethos of growth and development in a serious way.
Likewise, long-run ‘supply-side’ issues linked with trade and capital flows, financial sectors, industrial deregulation, and disinvestments of public sector enterprises are also important in various ways. In fact, the long-run focus of the budget has to be both on domestic and external liberalisation, because the former consists of relaxing restrictions on production, investment, prices, and, thereby, it attempts in assigning a bigger role to the market system for performing the various functions of the economic system, including resource allocation; and the latter consists of relaxing restrictions on international trade flows of goods and services, technology, and capital. In fact, these two kinds of liberalisation are inter-linked with each other.
Prior to making any comments on what we expect from the forthcoming budget for the Fiscal Year 2009-2010, it is important to note the following:
The issue of deficits in all its connotations
Unlike many other industrialised countries, budgets in India are not confined to the current account. We in fact, go for a consolidated budget, which has both a current account and a capital account. The fiscal deficit is the sum of the deficits on both the current and capital accounts. Such budgeting practice has a distinct advantage of concealing a large current account deficit by showing a sizable inflow on the capital account say by taking a loan.
When there is a current account deficit, it implies that expenditure is more than receipts. In other words, there is a revenue deficit, which, in fact, measures the deficit in the current account in terms of: (a) primary deficit (excess of what the government spends on purchases over its revenues), and (b) interest on past debts, which is also an expense and is paid to banks that buy government securities. All this leads to the conclusion that whereas the primary deficit directly converts the public savings into consumption and lowers the aggregate saving rate in the economy, the payment of interest on the existing debt does not do so. The primary deficit, therefore, is also understood as an excess of the portion of the government expenditure that enters into consumption stream of the economy over revenues.
It is heartening to see that over the years the primary deficit is gradually disappearing and is being replaced by a (small) surplus. Because of this the government does not have to crowd out private investors with its borrowing. All this has added tremendously to the big wave of private investment, which is building up in the economy. There is, therefore, a sharp movement towards higher value–added goods in the production basket and this is the real economy that underlies the rising share market prices.
The disappearance of the primary deficit and its replacement even by a small surplus has a highly favourable effect on the quantum of the fiscal deficit. This is the brightest silver lining of the annual budgets in recent years.
The industrial front
On the industrial front, there has been a good progress in terms of delicensing, ease of entry of foreign investors and trade liberalisation. Many restrictions are now gone and the positive results are becoming visible. During the second phase of reforms, the supply-side difficulties in the industry have been removed to a large extent, but there are still demand-side constraints, especially in the manufacturing sector. But despite this, it is heartening to note that, as compared to earlier years, the growth in industry has been satisfactory to a large extent, and its share in gross domestic product has been showing an upward trend. Whether the double-digit growth in industry would be sustained will depend basically on the demand for industrial goods.
Presently, about 88 per cent of the demand comes from domestic markets and the remaining about 12 per cent from international markets. There are positive indicators that such demand would be maintained and industry would sustain a double-digit growth in the coming months.
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