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Monday, July 06, 2009

Parsing the budget announcements

The Great Recession has induced a unique setting for Indian economic policy. See India in the Great Recession (April 2009) and The setting for the budget speech (May 2009).

These articles emphasise that the dominant story of Indian business cycle fluctuations is the situation with private corporate investment. When this analysis was written (April and May 2009), the problem of a drop in private corporate investment was only a conjecture. Now some data is showing that there is indeed a problem. Here are the two most interesting measures of investment activity, using monthly data. In both cases, I show the average of the four most-recent values of the seasonally adjusted annualised rates (SAAR). This is similar to the familiar year-on-year growth rates of monthly data with one big difference: the yoy growth rate is the average of the latest 12 values while here we're averaging the latest 4 months so as to pickup the recent action:

MonthIIP capital goodsCapital goods imports
May 2008 31 -13
Jun 2008 19 16
Jul 2008 -18 98
Aug 2008 8 -4
Sep 2008 50 25
Oct 2008 1 -16
Nov 2008 2 -36
Dec 2008 11 41
Jan 2009 -37 -37
Feb 2009 14 -32
Mar 2009 -10
Apr 2009 -21

This data shows that there is a significant threat of a substantial dropoff in private corporate investment.

Fiscal, financial and monetary institutional reform

FM says he will `return to the FRBM target for fiscal deficit at the earliest and as soon as the negative effects of the global crisis on the Indian economy have been overcome'. Apart from that, there was nothing on fiscal, financial and monetary institutional reform. Pranab Mukherjee said:

Never before has Indira Gandhi's bold decision to nationalise our banking system exactly 40 years ago - on 14th of July, 1969 - appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.

Put together, I did not see progress on fiscal, financial and monetary institution building.

Financing of the government

There was no statement on using sale of government assets in order to pay down debt.

The GST is to be implemented from 1 April, 2010. I do get nervous given the immense complexity of that effort and the lack of accomplishment on the ground.

There are five major bad taxes in India: STT, cesses, customs, octroi and stamp duty. The budget speech tinkered with none of these. There was an `abolition' of the commodities transaction tax (which had never been levied anyway). It is distortionary, having taxation of some kinds of financial transactions but not of others. The `fringe benefit tax' was abolished.

There was no movement towards fiscal austerity that I could discern.

Put together, I did not see progress on financing of the State.

Core public goods

Core public goods are the genuine business of the State. There seem to be substantial increases of expenditure on defence and home. This might suggest that the fraction of public expenditure on core public goods might have gone up. I am, so far, not able to tell whether this change is significant.


There seems to be more money being spent on infrastructure. There is little evidence of institutional reform. The Ministry of Finance seems to be keen on building IIFCL, which seems worrisome. It is not clear that IIFCL will not suffer the fate of IDBI / IFCI / etc.


The spending on Sarva Shiksha Abhiyan (SSA) has not risen in nominal terms, which is good, but a new Madhya Shiksha Abhiyan has been created. If this ends up being run like SSA, then we'll know that there is little interest amongst politicians in actually getting India's children educated.


There are good noises about fertiliser and oil subsidies, but no action.

The role of the budget speech

Maybe we do wrong in asking for a significant workplan in the highlights of the budget speech. Maybe a lot of good things will get done even though they were not announced. I have an article in Financial Express titled Which type of budget speech is this?.

Fiscal numbers

Here is a spreadsheet (.ods file) where I have a few years of data, with some value added, from `budget at a glance'. This has no corrections for the off-balance sheet stuff.

Tax revenues were at 9.17% of GDP in 2007-08. These dropped to 8.59% of GDP in 2008-09 (RE). The budget projection for 09-10 wisely places this number at 8.07% of GDP.

Non-tax revenues are projected to go up a bit: from 1.77% of GDP in 08-09 to 2.39% of GDP in 09-10. This is primarily on the back of revenues from the 3G spectrum auction.

Put together, revenue receipts are budgeted at 10.45% of GDP compared with 10.36% last year and 11.3% the year before. These projections seem reasonable to me.

Fiscal stress + gloomy revenue projections should have led to belt-tightening on expenditure. This did not happen, partly owing to the 6th pay commission.

Non-plan expenditure rose by 21.8% last year and is projected to rise by 12.6% this year. It will go from 10.59% of GDP in 07-08 to 11.83% of GDP in 09-10.

Interest payments to GDP - a key marker of fiscal stress - continues to be in troublesome territory, from 3.57% in 07-08 to 3.84% in 09-10. This is despite the dramatic collapse in inflation which should have made government borrowing much cheaper.

Plan expenditure is growing exuberantly: from 4.28% of GDP in 07-08 to 5.53% in 09-10.

With sombre revenues and a good deal of spending, we have dire deficits. The revenue deficit jumped from 1.1% in 07-08 to 4.45% last year and is budgeted at 4.81% the coming year. In other words, there is not even an attempt at fiscal correction.

The fiscal deficit was at 2.65% of GDP in 07-08; this went up to 6.02% last year and is budgeted at 6.82% for 09-10.

And finally, we switched around from a primary surplus of 0.92% in 07-08 to a primary deficit of 2.47% last year and are budgeted to have another big primary deficit of 2.98% in 09-10.

There is a caveat on all these numbers when expressed as percent of GDP. Nominal GDP is projected to be up in 09-10 by 8.35% when compared with the previous year. It is possible to think of combinations of real growth and inflation which will get this, but I would have been happier with a somewhat lower projection.

Other interesting comments: See Jahangir Aziz in Financial Express; M. Govinda Rao in Business Standard; an editorial in Business Standard.

Good news

Don't I have any good news? I do. At NSE, derivatives on Nifty did turnover of Rs.707 billion or $14.7 billion. And, currency futures at NSE did turnover of $1.2 billion. So we're in good shape on having a strong equity market, and we're learning how to do currency trading also.


  1. 1) Plan expenditure seems to be mostly on revenue account. The Capital part of plan expenditure is just climbed back past 2004-2005 budget. So even that plan expenditure jump may not really be creating new stuff.
    2) Market borrowings are expected to by about 2 Lakh Crores. The rest of the govt borrowing is going to come from the Central bank. How inflationary would that be ?

  2. I would like to add that on the budget day passive index ETFs like Nifty BeES did a high volume on NSE. The approximate volume was more than a million ETF shares. It is nice to know that Indian investors are finally begining to understand the benefits of passive investing and index ETFs / funds.

    Sameer Desai,
    Index ETF investor.

  3. The revenue/capital distinction is not particularly important. E.g. the bulk of expenditures on core public goods (police, judiciary, defence) are all revenue expenditures. The capital expenditures of the Indian State are remarkably small once you remove military hardware from the reckoning (though this is not to imply that external security is not a public good).

  4. Wouldn't all infrastructure projects be capital expenditure? So a low cap exp means low "new" infrastructure creation. Am I missing something here ?

  5. Almost all infrastructure is off-balance-sheet for the government qua government. Most `capital expenditure' of the government is military hardware.


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