I rise to present the Union Budget for 2013-14.
It is exactly five years since I presented my last budget in February 2008. Much water has flown down the Cauvery since then, and I realise that the situation today is the exact opposite of what I thought it to be on that day. GDP growth is down, consumer price inflation is still in double-digits, the fiscal deficit is still very high and the current account deficit is clearly unsustainable.
With all humility, I would like to acknowledge that my reading of India’s growth prospects in 2008 turned out to be totally wrong.
In 2008, with considerable pride I mentioned that “the four years to 2007-08 have been the best years so far but, may I say with humility, that the best is yet to come.” I am afraid, I have to eat my words today, in even greater humility. The five years since then have turned out to be very difficult for the Indian economy, and we have to produce our best today in order to see that the economy does not sink further into a morass of despondency and pessimism.
While it would be easy to blame the global financial crisis and high oil prices for our troubles, I must admit that crises come and go, but it is the quality of our response to troubles that matter. We have flunked the test before, but we cannot flunk it again. The future of the Indian economy and the well-being of our 1.2 billion people is too important to be sacrificed on the altar of ego.
In order to correct past mistakes, it is first important to acknowledge them. So I will begin by explaining what went wrong from 2008 to now, and how I propose to begin setting things right with this budget and beyond.
One, we assumed in 2008 that 9-10 percent growth was our birthright. It turned out that we have to work hard for growth. In particular, spending our way out of crisis is not always the best way to revive growth after a global financial crisis.
Two, there can be no growth with high inflation. We know our social spending did a lot of good, including lift several millions out of poverty, but the resultant inflation is pulling some of them back into poverty while also making our spending on schemes like the Mahatma Gandhi Rural Employment Guarantee Scheme unsustainable. If the scheme does not create commensurate assets, the higher spending cannot result in higher rural productivity which is essential to pay for the scheme in future. We have to fix this scheme to obtain optimum benefits.
Three, our current account deficit, which has reached an all-time high of nearly 5 percent of GDP, is simply not acceptable. This has happened due to our failure to pass on the costs of higher global fuel prices to users in India, as a result of which domestic consumption soared, and people purchased diesel SUVs and used diesel inefficiently. Not passing on real cost increases to customers is a moral hazard we could ill afford. It ruined both central finances and our external deficits. We have begun correcting that, but much more needs to be done before we can say we are out of the woods.
Four, we cannot borrow our way to higher spending – whether from internal sources or from abroad. That way we are headed for the same future as Greece or Spain or Italy. We went down that road in 1991, and I would not like to go down in history as the Finance Minister who led the country to external bankruptcy.
It is with these explanations and acknowledgements of past mistakes I would like to present the Budget for 2013-14. Madam Speaker, I would like to outline the key fiscal and other objectives for the UPA government in this last full budget before the next general elections due in May 2014.
In many ways, the situation facing today is not very different from what we faced in 1991. The only difference is that we have more forex reserves now than at that time. This is a matter of both regret and hope. Regret, because we failed to learn the lessons of the 1980s which brought us to 1991; hope, because we know we faced the earlier crisis with resolute action. This time too I hope to do the same. Our esteemed Prime Minister was Finance Minister in 1991 under Narasimha Rao; I hope I will have the same support of the Prime Minister and the party President, Smt Sonia Gandhi, as I set out to correct the mistakes of the past nine years.
First, our export system is broke. Over the first 10 months of this year, we have seen exports crash and imports rising faster, leaving us with a huge trade deficit of over 10 percent of GDP. While recognising that exports will not revive till global growth recovers, we still have to fix our huge current account deficit (CAD). To give exports a sharp leg-up and give the system some shock-treatment, I propose to devalue the rupee to Rs 60 to the dollar from today. The Reserve Bank Governor will make a separate announcement to this effect on dollar purchases at this price, and the plans for shoring up dollar reserves.
Second, this devaluation will push up the cost of raw materials we use, especially imported oil. We are, therefore, raising the prices of diesel by Rs 5 a litre from tonight, and a further Rs 5 from July 2013. This will eliminate the diesel subsidy completely if global oil prices remain where they are. Since the hike in prices will mute domestic demand, we expect our import bills and current account deficits to come down. Over time, this will improve our dollar inflows, and take the rupee higher, and bring further relief on the inflation front. We have to face short-term inflation in order to bring more stability to prices in the long run.
Third, we have a problem in all our energy pricing, from oil to gas to power and coal. Starting immediately after this budget, we will be freeing prices of coal and gas in stages. We will also be bringing a separate legislation to end the monopoly of Coal India in coal mining and open up more areas for private and public sector energy exploration. The Cabinet Committee on Investment headed by the Prime Minister is expeditiously clearing all pending coal and other projects from an environmental angle with due safeguards – it is a one-time quick clearance - so that investment can quickly get off the ground.
The petroleum and coal ministers will be making separate announcements in this regard later today. The net result of all these changes will be to raise energy prices substantially, but in a year or two, we will see supplies rising as more supplies come on stream. We only need to note the example of the US, which has managed to achieve near energy self-sufficiency by opening up shale gas supplies. The US is no longer as dependent on Gulf oil as it was a decade ago; unfortunately, we are. Our policy has the medium-term goal of reducing oil imports to 50 percent by 2018 compared to 80 percent today.
Fourth, we are winding up all centrally-sponsored schemes and instead handing over the savings to states for use in their own social sector schemes. I know in the last budget my predecessor talked about the Food Security Bill and other such plans, but I find that the states are capable of doing the same job. They should know best where food security is really required. While Tamil Nadu has opposed our version of the Food Security Bill, Chhattisgarh has already gone ahead and implemented it.
The centre has over a 100 schemes, of which around 15 are major ones. These include the MNREGS, the Integrated Child Development Scheme, the National Health Mission, the JN National Urban Renewal Mission, the Sarva Siksha Abhiyan, the Mid-Day Meal scheme, the Indira Awaas Yojana, and others which collectively have an outlay of Rs 15 lakh crore in the 12th plan. That’s around Rs 3,00,000 crore every year.
What we propose to do is distribute our share of this funding of centrally-sponsored schemes to states for use in the relevant areas. We will only indicate the areas where the money should go to. With this move we will not only be striking a blow for federalism, but also ensure that the money is better spent on schemes that are designed from the ground up and not top-down.
Fifth, we are always grappling with the issue of bloating subsidies. With this budget, we are seeking to wean ourselves away from unnecessary subsidies. The changes in energy pricing will eliminate subsidies in fuel by the end of this financial year. That still leaves subsidies in fertiliser and food, the other big areas.
This is what we propose to do. The fertiliser subsidy was intended to be a benefit for small farmers, but it has ended up being a subsidy for the fertiliser industry. From this year onwards, we plan to eliminate the fertiliser subsidy altogether by freeing all prices, but this increase in fertiliser costs will be captured in higher food prices – where the subsidy bill will rise. Farmers will not be affected at all since their support prices will be adjusted to absorb the higher fertiliser prices. The Commission on Agricultural Costs and Prices will work out reasonable use rates for fertiliser in various crops and make appropriate recommendations on minimum support prices for the 10 most crucial crops. This decision will push up food subsidies in the short run, but will have two major benefits for the economy: a better fiscal deficit, and improved and balanced usage of various nutrients by Indian agriculturists. Balanced usage will have beneficial effects on agriculture, making the soil less vulnerable and improving farmers’ profits.