Economic Times, May 5, 2014

Recast Budget 2014 numbers but don’t let recast be driven by political vendetta

Monday May 05, 2014, 02:15 PM

GDP growth at sub-5% for the second year running, high and persistent consumer price inflation at close to 10% for more than four years running, savings and investment ratios that are lower than the highs reached less than five years ago, an artificially-suppressed current account deficit, an artfully-contrived fiscal deficit and, now, the possibility of El NiƱo in 2014. On the economic front, all the ingredients for a perfect storm.  

The only thing keeping the storm from breaking over our heads is the hope that after May 16, we’ll see a stable, credible political formation at the Centre. In any other circumstances, overseas investors would have turned tail and fled our shores, leaving the rupee to sink like a sack of potatoes. Instead, investor sentiment is cautiously optimistic.  

There is one thing that could change this, and with disastrous consequences: the prospect of political instability, of short-lived governments like A B Vajpayee’s 13-day government in 1996 and the H D Deve Gowda and I K Gujral governments that followed.  The challenge is to ensure we don’t do anything to dispel the optimism the investor community seems to have reposed in us.  How can we do that?

In two ways. First, parties must show the necessary political maturity to sink petty differences and work in the larger interest of the country. Regardless of the precise number of seats won by the BJP and the Congress, it is a foregone conclusion that alliances will have to be cobbled together to arrive at a credible majority. This is not going to be easy, when we have so many parties, some with few seats to their name, but with bargaining power far in excess of numerical strength.  

Rusty to Trusty Numbers Second, assuming we do vote ourselves a stable government, the next challenge, after the scramble over Cabinet berths is over, is to present a “credible” Budget in Parliament; one that not only sets out the government’s economic roadmap but, more importantly, gives a correct picture of the government’s finances.  

Almost no one expects the fiscal deficit for 2013-14 to be 4.6%, as stated in finance minister P Chidambaram’s vote-on-account in February this year. Or the deficit for the current fiscal to be remotely close to 4.1%, minus the generous dollops of financial engineering that marked the February exercise.  

According to the Controller General of Accounts, by February 2014, the fiscal deficit-to-GDP ratio had already exceeded the target for the entire year, while the primary deficit was close to 200% of the target. It is no secret that the smoke-and-mirrors game resorted to by past governments, albeit to a small degree, has been perfected by Chidambaram.

So, the Budget gives an excessively rosy picture of government finances. In the unlikely event of the Congress having a voice in the new government, that charade might continue. But not otherwise.  

The danger is that an alternative political configuration might be tempted to try and get political mileage by going to the other extreme and painting the fisc in far worse light than necessary. The parallel with what happened in Greece in 2009 might seem a bit far-fetched. But we live in troubled times, when parties are more intent on scoring brownie points against each other than in the long-term interest of the country.  

For those who might not remember, the Pasok government that was elected to power in Greece in October 2009 reported a deficit of 12.7% (later revised to 15.7%), up from the previous government’s 6-8%.    

Greek tragedy  

It is a different matter that the accuracy of the revised figure has since been questioned. Indeed, the Greek Parliament called for an official investigation in February 2012, following accusations that the deficit had been artificially inflated in order to justify harsh austerity measures. But the damage had already been done; with disastrous consequences for the Greek economy.  Faced with the temptation to discredit his predecessor, the new finance minister might be tempted to re-enact the Greek drama. But that would be catastrophic. It would confirm what rating agencies have long suspected and give them a reason to downgrade us, adversely impacting overseas capital flows that are critical for financing our current account deficit.  

Damn truth and statistics  

Smoke and mirrors has long been a part of government accounts. Unfortunately, the present cash system of accounting facilitates such subterfuge by requiring government to book expenditures only when they are paid out, not when they are incurred but payment is deferred. The best thing the new government could do would be to announce a shift to an accrual system of accounting that eliminates this loophole once and for all. And then, slowly but surely, work to presenting a “true and fair” picture of government finances.  

As Mark Tully once put it well, there are no full stops in India. Every government builds on the work of the previous; the legacy is like the curate’s egg, good in parts, but sharp breaks, especially if driven by narrow political ends, are inadvisable. 

My view:

The comprehensive ‘note’ which will be ignored by the political leadership that comes to power post-May 16 only at its peril, carries a message much deeper and louder than the written words in the article. It is not just the jugglery of figures in the budget or blurred vision of the political leadership about handling of pressures, both internal and external cause worry. The conduct of the previous Lok Sabha and the pre-election rhetoric across political affiliations do not assure a post-election consensus on national priorities. If politicl stability with an assured continuity of pragmatic policies can be ensured, the country has the resources and workforce which can bring back normal health to the economy. This is the godsent opportunity for the political leadership to prove to the world that Indian democracy has matured. The rich, the powerful and the families which are rich and powerful should participate in the present re-emergence of India Growth Story with an approach of ‘Give and Take’ which, incidentally, is imperative for the survival of the nation.
M G Warrier, Thiruvananthapuram



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