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Budget 2014: Chidu's growth assumptions are built on sand

When asked at the post-budget press conference that he addressed about being over-optimistic on growth in 20-14-15, finance minister P. Chidambaram said every finance minister must be ambitious and take risks. “The reach must be beyond one’s grasp, so that an extra effort can be made.”

It is easy to say that when the extra effort will, in all probability, have to be made by someone else.

The nominal GDP growth for 2014-15 is pitched at 13.4 percent. Chidambaram said that he assumed a real GDP growth of 6 percent. The number, says Soumya Kanti Ghosh, chief economic adviser at the State Bank of India, is overly unrealistic. His view is not a solitary one. Sure, growth is picking up but to expect it to get to 6 percent in a year is not being ambitious, it is fantasising.

 Budget 2014: Chidus growth assumptions are built on sand

Union Finance Minister P Chidambaram. Image courtesy PIB

That apart, what has Chidambaram’s budget done to put the zing back in the economy? Not very much.

Just look at plan expenditure, which does not even get a paisa more than what it did in 2013-14 – Rs 5,55,322 crore. Plan expenditure is, at a very broad level, the more productive part of spending on asset creation and on centrally-sponsored and other flagship social sector schemes. Government Plan expenditure can act as a booster shot for a faltering economy, one with a lot of trickle down to other sectors.

Chidambaram says he has not clamped down or cut back on Plan spending. Since ministries had not spent the bulk of the Rs 5,55,322 crore he gave them last year, he looks at it as saving and is giving back the same amount in the hope that they will now spend. But that is semantics. Worse, it is further proof of the complete paralysis of government during the UPA regime.

But let’s not get bogged down in Plan and non-Plan (all other spending heads). Let us, instead, look at a better test of productive spending – capital versus revenue expenditure.
Capital expenditure (used for creation of physical assets) in 2014-15 is down 6.9 percent from what was budgeted in 2013-14. In contrast, revenue expenditure (salaries and other running expenses) is up 7.9 percent.

How is the economy to get its zip back with this kind of spending pattern?

Perhaps Chidamabaram is betting on the various excise sops he has given to the capital goods, consumer non-durable and automobile sectors.

But can tax sops alone revive industries which are ailing because of serious structural problems in the economy? The capital goods sector is languishing because domestic industry has stalled planned investments and is postponing fresh investments. These decisions have less to do with excise duties and more with issues like infrastructure constraints and the difficulty of doing business.

Chidambaram may take comfort from the fact that “there was no steep decline in investment” (while pointing out that the investment rate had slowed from 35.5 percent to 34.8 percent between 2011-12 and 2013-14) but are the conditions ripe for an investment revival? Clarity on that will emerge only after the elections. A stable government could settle investors' fears (assuming it takes the right decisions) but an unstable one could spook the investment climate further. The automobile sector is ailing because of lack of demand and that, in turn, has to do with inflation more than anything else. Will people start buying more cars just because prices are down when prices of other essential items, notably food, continue to be at rather elevated levels? Consumer confidence is picking up gradually, but it will not immediately provide a big boost to growth.

Is Chidambaram banking on the Rs 6,60,000 crore worth of projects that the government has cleared to revive growth? But there’s a fairly long path to be negotiated from the time of clearance to actualization. And for the benefits to accrue to the economy takes a might longer.

That’s why Chidambaram’s assumption of growth next year does not pass the smell test. But then, who’s going to hold him to these assumptions?

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Updated Date: Feb 17, 2014 18:20:03 IST