India: FY 2013-14 Budget Intended to Help Congress Party Win Upcoming General Election

India is a democracy and the country’s fiscal year (FY) 2013-14 budget reflects this political philosophy as it’s designed to ensure the ruling Congress Party remains in power for the foreseeable future. Consequently, it shouldn’t come as a surprise if New Delhi moves up the general election – currently scheduled for sometime before May 2014 – to later this year in order to take advantage of the goodwill generated by the spending increases included in this budget

Finance Minister Chidambaram Palaniappan’s FY 2013-14 budget increases government expenditures by 16 percent primarily through higher funds for social programs focused on health and medicine, food security, women’s safety, education, agriculture, and water and sanitation.

Defense spending, however, received a relatively slight five percent increase (the lowest in over a decade) to $37.45 billion. Compared to increases of 17 and 12 percent the previous two years, this will disappoint the military but won’t come as a surprise since it was telegraphed – especially in light of the upcoming elections – and could be increased during the year.

These spending measures have disturbed economists who expected the minister to continue on the austerity-focused path that had seen him reduce expenditures by raising fuel prices and increasing revenues by opening the retail and aerospace sectors to foreign investment.

Chidambaram, however, was forced to walk a tightrope between appeasing the Congress’ leadership, placating and staving off a credit rating downgrade – something India has been threatened with for some time. I believe the minister has essentially given in to the political leadership who will only be pleased with the FY 2013-14 if it helps them win the general election.

On the other hand, this budget does nothing substantive to help solve the most immediate economic threat facing India i.e. its persistent non-compliance with its own fiscal deficit targets. Sure, the budget states the government will reduce the fiscal deficit from 5.2 percent in the current FY to 4.8 percent of gross domestic product (GDP) – a goal driven largely by the demands of the rating agencies.

How it will achieve this goal remains in question as the finance ministry’s projection is simply based on an assumed higher GDP growth rate – over six percent versus the current five percent – and rising revenue.

For example, this budget sets revenue targets from the sale of the government’s shares in domestic companies and telecom sector fees. The problem is that these figures are based on FY 2012-13 targets, which, although lower, were still too high for New Delhi. Indeed, if I base my assessment on the telecom sector – the upcoming auction of mobile airwaves attracted only one bidder – then it’s almost certain New Delhi will not come anywhere close to its targets.

However, it’s not like the country hasn’t been here before. In fact, it was just five years ago when the government increased its pre-election budget which helped the Congress Party win the 2009 election and caused the fiscal deficit to jump from two to six percent.

Since this has worked once, it wouldn’t be surprising if it’s repeated again. However, a legitimate argument could be made that this history and the continuing dire global financial climate will cause the international community to be more circumspect.

Perhaps for this reason, this budget contains several initiatives designed to spur investment in infrastructure, equipment and small businesses. New Delhi’s hope is that foreign investment will help magnify its investments in these sectors which include a 29 percent increase for infrastructure and development, 46 percent higher investment in development programs in rural areas and a 22 rise in the farm ministry’s budget.

The finance ministry has also simplified the registration process and allowed investments in corporate bonds and government securities to be used as collateral to meet margin requirements. These initiatives, combined with earlier actions liberalizing the retail and airline sector, could spur growth but the government’s inconsistency will limit the benefits.

This inconsistency includes multiple confusing policies, higher taxes on local firms that generate incomes over $1.85 million, a 10 percent temporary tax on individuals with incomes over $185,000, undefined regulation that gives wide latitude to tax collectors and no cut in withholding taxes for debt investments.

Finance Minister Chidambaram had a choice to make with this budget: Implement policies to restore confidence and jump-start economic growth by May 2014 or fund social programs and call early elections. He seems to have chosen the latter path choosing populism ahead of pragmatism.

I fail to see how this increased spending will not raise the deficit past the targeted rates and prevent a downgrade of India’s credit rating as the ministry’s projection of rising revenue and lower deficits is based on growth rates and income streams that seem unrealistic.

Admittedly, lowered subsidies will help – fuel subsidies are forecast to decrease from 2.6 percent to two percent of GDP by the end of the fiscal year – but they will likely be absorbed by implementation delays (likely due to concerns about their impact on the popular mood) and a higher than projected defense budget.

The one thing that’s clear is that the FY 2013-14 budget is intended to ensure the Congress Party’s success in the upcoming elections and, in the absence of unpredictable events, it may well achieve that goal, score that for Chidambaram Palaniappan and the Congress Party.