An account for four months

The interim budget presented by Pranab Mukherjee kept well within the boundaries of what an outgoing government should do on a vote-on-account. Despite the expectations in many quarters about bailout packages for this or that sector, the government correctly restricted itself to outlining its achievements over the last four years and offering no tax proposals. This was a responsible move for a number of reasons. First, without the adequate numbers in Parliament any discussion over a tax proposal could have been seen to be populist and could have led to discussions that could possibly have led to the vote on account not being passed. Its passage is necessary for the smooth functioning of the government over the next four months, until a new government is in place after the elections. It would have been irresponsible to take that risk. Second, proposing any major initiatives would have set a dangerous precedent. It should be the prerogative of the next government to choose its tax and expenditure policy. In any such situation where a government is on its way out, this should remain the convention. If today this convention had been set aside on account of the economic slowdown, the next time there would have been an earthquake, a tsunami, a drought or a flood that could be regarded as pressing. The best thing to do was not to disturb the established convention that the outgoing government does not attempt to use its incumbent status to set a policy agenda. The stimulus packages already announced have a lot left that needs to be implemented before announcing new measures.

Apart from the question of responsibility in the political sense, there was also little scope for further fiscal measures. As already announced by Montek Singh Ahluwalia, there were unlikely to be any further measures after the stimulus packages announced by the UPA government. In a macroeconomic context the expansion in the fiscal deficit from 2.7 per cent of GDP in 2007-08 to 6.0 per cent of GDP in 2008-09 is huge. As a starting point for an economy witnessing a slowdown and seeking to implement a counter-cyclical fiscal policy, there could not have been a more difficult time. Further fiscal expansion could erode confidence in the government's capacity to pay. This is seen to be happening with governments across Europe and no one should be under the illusion that it cannot happen to India. The budget estimate for the fiscal deficit in 2009-10 of 5.5 per cent is thus a correct starting point. If the slowdown gets worse then when the new government makes its budget proposals in June/July it could propose a larger fiscal expansion. This could happen either due to higher tax cuts, lower tax collection, higher expenditure or explicit bailout packages that may have to be offered in 2009. Further, the nominal GDP growth of 11 per cent used for estimating the "percent to GDP" numbers for the deficit is also unlikely to be achieved. The assumption that nominal GDP will grow at 11 per cent implies that if inflation is at 2-3 per cent then production must grow in real terms by 8-9 per cent. This, in a year when most predictions are already below the 6 per cent mark, is rather ambitious. Lower GDP numbers will translate into higher fiscal deficit ratios.

Looking forward, these deficit numbers will make the job of the next government very difficult. Getting back to the path of fiscal responsibility is important to restore the confidence of the market. Even if today the government is off-path, it must ensure that it is seen to offer credible commitment to come back to that path. Second, there is a danger of the large fiscal deficit spilling over to a current account deficit. While on the one hand today we are being helped by the low price of oil, there is danger that the sharp fall in exports as other economies do badly increases our current account deficits in the coming two or three years. Giving in to lobbying for larger bailout packages and fiscal stimuli would have been irresponsible.

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