That is not flattering for an economy that has clocked 7 per cent in the previous decade, and even faster growth rate in the decade before that. But one of the things that acceptance of a modest growth figure necessarily forces on you is hard choices. One can’t assume a return to mean, and assume revenue based on an economy growing at 7 per cent. If the money is not going to be there, it’s better to face reality — especially the reality of the Budget, in which the deficit is massively understated by about 2 percentage points of GDP.
All Budgets face resource restraints, but the coming one will have to confront them in their full severity.
Looking beyond the Budget, the medium-term outlook looks decidedly cloudy if growth takes time to return to the desirable 7 per cent. The finance minister in her Budget speech should spell out how exactly she intends to get back to the 7 per cent track, and the hard decisions she intends to take in order to adjust to the realities of a slowing economy until growth momentum returns. Predictability in government actions is a virtue in itself.
Insofar as revenues fall short, the axe will have to come down on expenditure — even though this is not what economists might advise in the midst of a slowdown. It is important that budgetary discipline be seen to be operating. And so outlays will have to be pruned, or kept at current levels. Unspent money should lapse. The sectors that have absorbed so much of public investment should be asked to show results — as railway revenues, highway tolls, higher power tariffs, and so on (internal and extra-budgetary resources, as they used to be called in Planning’s heyday). If the finance minister looks hard enough, she should be able to find scope for more non-tax revenue measures. For instance, fresh capital for the government-owned banks should come from the revenue garnered by privatising one or two of them — the taxpayer should not be saddled with the burden.
Above all, the time has come to modernise budgeting. Chiefly, that should mean moving from cash accounting to accrual accounting so that bills that are due but not yet paid are accounted for. Similarly, the government should put out information on off-balance sheet issues that are not there in the Budget. This will prevent further reports by the Comptroller and Auditor General pointing out hidden items of expenditure — like public-sector companies borrowing money from banks to pay the food subsidy bills, or taking advance payment from railway entities to avoid showing a loss in railway accounts. A more credible set of numbers will be a good thing in and of itself, it will also help make government functioning more transparent.