The FM has kept his pledge. He has contained the fiscal deficit for 2012-13 at 5.2%. All of us know that this is at the cost of a cut in Plan Expenditure of nearly Rs 90,000 crore. He pegs the deficit for the 2013-14 at 4.8%. Since he sees no choice but to appease the rating agencies, chances are he will stick to this target as well. The question is: how?
Many analysts have pointed out that the revenue estimates are optimistic even if we grant that growth revives to 6%- the figures non-tax revenues, including divestment proceeds, certainly are ambitious. Subsidies in the coming year are to decline by Rs 25,000 crore, which means fuel subsidies will be axed even further, which would be a tall order as elections approach. It is more likely that the FM will meet the fiscal deficit target the same way he did this year- by pruning Plan expenditure and capital expenditure. The increase in 29% in Plan expenditure is clearly iffy.
Growth has sagged in the current year because of an investment famine and cuts in government capital expenditure have clearly contributed. If the government resorts to the same in 2013-14, that is bound to tell on growth. The betting is that private investment will somehow revive strongly, helped by lower interest rates. As fuel subsidies are pruned, inflation will stay in the region of 7%, so there is little the RBI can do to help. More importantly, it is not at all clear that high interest rates are the deterrent to private investment- real interest rates today are way below they were doing the boom period of 2004-08.
Private investment will revive if investors see demand looking up. Either export demand must pick up with an improvement in the global situation. Or domestic demand must revive- and, in the present situation, this requires a strong push from the government. Think of the what the highways project did during the NDA regime. But, if the government is fixated on a fiscal deficit number, there is no way this can happen.
For me, the big puzzle is why rating agencies are so obsessed with the fiscal deficit number. India's total debt to GDP ratio of less than 70% looks good in the present environment; India is among the few countries to have seen the ratio declining post-crisis. States have got their acts together on the fiscal front. External borrowings are low. If only the rating agencies would allow elbow room in respect of the fiscal deficit, it will be easier to get into a virtuous cycle of higher growth, higher revenues, and lower fiscal deficit. Historical experience shows that nations grow their way out of a high debt situation. The G-20 is veering towards reducing austerity. But here the rating agencies won't allow it. And we can't annoy the agencies thanks to our yawning current deficit.
Just hope and pray that gold prices collapse. Then, the current account deficit will narrow. That will give us greater freedom in respect of fiscal policy. Also, pray that the global environment improves. t's hard to see how the present fiscal approach can lead to any early revival in growth.
Some related thoughts in my ET column, Budget must cheer the markets.