P Chidambaram as finance minister seemed to set much in store for fiscal responsibility and budget management. He used to refer frequently to his commitment to the FRBM Act and to the ability of the UPA government to conform to the norms set and to the goal of eliminating fiscal deficits by 2010. In its last budget before the elections, the UPA government seems to have thrown away all these pious proclamations: the interim budget presented by acting finance minister Pranab Kumar Mukherjee, will witness this year ending with a fiscal deficit of 6 per cent against the budgeted 2.5 per cent and projecting a deficit of 5.5 per cent for 2009-10 which is likely to be exceeded in this period of economic meltdown; adding the states' fiscal deficits of another three per cent plus and off budget hefty bonds for fertilizers, food and oil, total uncovered deficit may well be in the region of around 12 per cent of GDP.

Mukherjee claimed to conform to the propriety of his government seeking a vote on account not resorting to new policy measures or tax efforts leaving these graciously to the new government. Of course this is making a virtue out of necessity: the vote on account requires the passage of the finance Bill by the Parliament and the UPA cannot be too sure of this in the context of the withdrawal of support by the Leftists; though the Samajwadi Party did help the UPA win the vote of confidence by its support to the nuclear deal, any harsh fiscal measures may not get support from the SP and even from some of the other constituents of the UPA. With the bickering over seat-sharing in UP, relations between the SP and the Congress are already strained.

Bypassing the budget…

All these claims appear unnecessary, thanks to the resort to the ingenuous alternative available: several finance ministers in the past have resorted to wide ranging fiscal changes outside the budget; for several years in the past, it was a common sight to witness changes in taxes and duties on petroleum products whose impact used to be even more severe than the fiscal changes announced in a budget.

The UPA government has resorted to this through two massive stimulus packages, one each in December 2008 and in January 2009. The hatrick was achieved by the third stimulus package that announced further reliefs and concessions on 24 February. The first two stimulus packages through duty reductions were estimated to have resulted in a revenue loss of over Rs. 40,000 crore; the third one announced a cut in service tax from 12 per cent to 10 per cent and a further reduction in excise duty on goods that attracted 10 per cent to 8 per cent, duty cut on bulk cement, extension of customs duty exemption to naphtha… together estimated to cause revenue loss of Rs. 30,000 crore. The 'propriety' referred to by Mukherjee is thus confined to his budget speech!

Yawning deficits…

With elections just a few weeks ahead, the massive handout to the rural electorate earlier has now been extended to the urban middle class as well. All these are bound to cause severe damage to the long term health of the economy imparted with such care in the years of reform since 199l. Just look at some of the blows inflicted:

• Total fiscal deficit of the Centre and the states along with outside budget provisions for oil and fertilizer bonds, amounts to around Rs. 650,000 crore.
• Sharp reduction in excise duty collections - from the estimated Rs. 137,874 crore revised to Rs. 108,359 crore; and this is before the third stimulus package!
• Customs collections are estimated to be Rs. 11,000 crore lower. This estimate is again prior to the third stimulus package.
• Corporate and personal income taxes estimated to suffer a shortfall of around Rs. 20,000 crore.
• On the expenditure side, an increase of close to Rs. 58,000 crore on subsidies on food, fertilizers and oil, Rs. 33,000 crore in pay and allowances for government staff including defence. Revenue expenditure is now estimated to exceed Rs. 8.03 lakh crore against the earlier estimate of Rs. 6,58 lakh crore. Along with the lower revenue receipts, revenue deficit is now estimated at Rs. 2.4 lakh crore against the estimated Rs 55,000 crore.
• This has to be met through much increased borrowings than budgeted - Rs. 3.3 lakh crore ( Rs. 1.3 lakh crore).

Rs. 70,000 crore plus of reliefs…

The two earlier stimulus packages do not seem to have delivered the expected results. Growth continues to be sluggish with consumption not picking up. Industry (eg: car manufacturers, aviation companies) has reaped the benefits of lower costs, but are not willing to pass these to the consumers. One sees poor effort on the part of the industry to reach out to the consumer and make him spend. If advertising is an index of marketing efforts, one notices a steep drop in ad spent; the only relief for the mass media is the massive step up of the advertising effort by the different departments of the government. These include little unknown arms like the ESIC! Great voter appeal for the UPA!

Banks, flush with funds continue to be cautious and are averse to lending at modest rates. The steep fall in the rate of inflation has not been accompanied by a corresponding a decline in interest rates. Except the State Bank of India, which has come out with a reduction in rates for retail lending for a year, other banks have not come with similar efforts. With exports receiving a hit and imports made much costlier by a steeply depreciated rupee, trade deficit has been widening.

UPA's score card…

In November Chidambaram as finance minister set the trend: addressing economic editors he presented a picture of the change in finances from the time the UPA government took over in 2004 to 2008 through the 54 months of the UPA rule. He had the comfort of high growth rates, buoyant revenues and big step up in investments in infrastructure and social sectors. Particularly impressive was the humungous step up in outlays on Bharat Nirman, JNNURM, infrastructure, agriculture, education, and other sectors. The Babus at the North Block dusted and updated that report as the budget speech of Pranab Mukherjee. It appeared a score card of the UPA's years in power intended for the electorate. While the achievements in several areas are impressive, failures relate to the inability to match outlays with outcomes; Chidambaram's constant refrain and lament did not seem to matter. Particularly depressing is the performance relating to roads and ports on which outlays have been stepped out massively.

Governance issues are weak. The focus in the coming months will understandably be on the elections and internal security; which means decision making even on crucial issues will have to wait for the new government. In the present fractured polity, one is also not sure of the electorate returning a party with a clear mandate. That should be cause for worry for the economy that seems to have lost much of its strength and health in recent months. The six or seven per cent growth rate much bandied about comes from the growth of the services sector that accounts for 54 per cent of GDP; but unlike agriculture or manufacturing, this growth component is not growing out of concrete contributions through products. There is the imperative to re-focus on the primary and secondary sectors. To this end the Budget and the stimulus packages have attempted this.