The new Indian Government brought down its first full-year budget last weekend. It has been keenly anticipated. Business Standard claimed: 'The market is expecting the Union Budget to be path-breaking, similar to the one in 1991, which led to the liberalisation of the Indian economy.'
As it was, the budget did not live up to that billing, but such expectations were unrealistic. The 1991 budget is legendary, formulated in a time of crisis. But with growth in India now reported to be 7.5%, there is no such acute urgency pervading the corridors of power. The budget, nonetheless, was received well. The Financial Times said that the package 'moves things in the right direction'.
One of the main measures in the budget, perhaps the main measure, is a relaxation of the previously planned fiscal consolidation to allow for more infrastructure spending. A drop in the subsidy bill is also projected, which will help pay for new roads, rail and power stations.
It certainly appears that India needs better infrastructure. Power outages left 650 million people without electricity for days in 2012. According to Ernst & Young, infrastructure bottlenecks take 2% off GDP annually. These and other ailments are discussed thoroughly by the Council on Foreign Relations here.
So the boost to infrastructure sounds good, provided the Government can overcome governance issues associated with such projects (again, see CFR). However, we need to be cautious.
Below is a graph of central Government spending on subsidies (food, fuel and fertiliser) and capital (which includes infrastructure). There is a reasonably clear negative correlation between subsidies and capital spending. As the subsidy burden increased on the back of high commodity prices, it crowded out capital spending, which is relatively easy to defer.
The dashed lines indicate what is forecast in the budget. It looks like capital expenditure will increase, although interestingly it will still be well below 2010 levels as a percentage of GDP. Correspondingly, subsidies will fall.
But we have seen this prediction before.
Below is a graph of the subsidy bill, with the dashed lines showing what was predicted in each budget. The Ministry of Finance has consistently predicted substantial falls in the subsidy bill that do not come to pass. If this happens again, there is the danger that capital spending will be trimmed...again. The fall in commodity prices makes me optimistic that the projected falls are realistic this time around, but the graph shows an absolutely dire forecasting record.
Discussion around budgeted revenues suggest that revenue numbers, for the first time in a while, look reasonable. This was even trumpeted in the official budget documents, which noted the 'Realistic figures shown...without showing exaggerated revenue projections.' Let's hope the subsidy projections are equally realistic.
Photo courtesy of Flickr user lecercle.