The majority of corporate India and the equity markets have given a thumbs down to the interim budget, primarily on the grounds that the government has proposed little to stimulate the economy. This is confusing, especially given these figures for fiscal deficit (FD) of Government of India
FD 2007-08 - 2.7% of GDP (Rs 1.27 lakh Cr)
FD 2007-08 (BudgetEstimate) - 2.5% of GDP (Rs 1.33 lakh Cr)
FD 2008-09 (Revised Estimate) - 6% of GDP (Rs 3.26 lakh Cr)
FD 2009-10 - 5.5%-6.5% of GDP (Rs 3.32-3.93 lakh Cr)
The FD is expected to more than double and go up by over Rs 2 lakh Cr in 2008-09, to reach its highest figure in more than a decade. In relative terms, this surely is one of the largest fiscal expansions over one year the country has ever seen and also one of the largest fiscal stimulus implmented by any country in the present recession. And it will be realized over the next 45 days. There just is limited fiscal space for any more expansion. So it is evidently wrong to claim that the government has done little to stimulate the economy. In fact, it appears to have done everything to increase aggregate demand.
So why is corporate India and the financial media not happy? It stems from a mistaken belief that tends to equate a fiscal stimulus to tax and duty cuts and sops to corporate India. In other words while the FD may have undergone steep increase and the economy has been stimulated, corporate India feels it has not been stimulated adequately!
Now, it is different matter as to whether the fiscal expansion has been channeled into the most effective expenditures. It is surely debatable as to whether it has delivered the biggest bang for the fiscal buck, and how much of this spending has been spent as opposed to saved or used to pay off debts. But it is undeniable that over the past few months - through loan waivers, Pay Commission handouts, two rounds of fiscal stimulus, and the increased allocations for various flagship programs in the interim budget - the Government has indulged in a big enough fiscal push to boost aggregate demand.
And do not forget that the cliche of the original Keynesian stimulus was "digging holes, filling them, digging again,...". Merely getting money into the economy by direct spending, without getting into the merits of what it was spent on, can generate a multiplier effect on the economy and boost aggregate demand.
And about stimulating corporate India, I am inclined to believe that, given the present economic uncertainty, even if the government were to shower tax and duty cuts and other sops, it may have achieved precious little in increasing aggregate demand. This will be the subject of the next post.
As an afterthought, the higher deficit figures may not be as categorical as it appears. Much of the Rs 2 lakh Cr rise in the revised deficit, can be attributed to the following, which were not accounted forin the 2008-09 budget estimates (BE)
1. Loan waiver - Rs 60,000 Cr
2. Pay Commission handout - 40% of Rs 70,000 Cr + about Rs 14,000 Cr for defence personnel
3. Additional fertilizer subsidy - Rs 44,000 Cr (The BE was Rs 31,490 Cr, while the RE projected it at Rs 75,849 Cr)
All this would itself amount to about Rs 1.5 Lakh Cr, leaving the actual stimulus at about Rs 50,000 Cr. And here too, let us not forget that about Rs 50,000 Cr has been foregone in tax revenues. So the question is where is the stimulus? One could say that the two largest stimulus components were the loan waiver and Pay Commission awards!