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A public policy blog from AEI
India was abuzz late last week over the fiscal year 2018–19 national budget. Among other things, it purports to more intensively subsidize hundreds of millions of farmers and start to provide free health care for hundreds of millions of the poor. Rather than analyzing these and other programs, I’ll jump to arguing they’ll never do what the central government promises.
Yes, that’s effectively calling Prime Minister Narendra Modi’s cabinet dishonest. To be fair, the dishonesty is mostly unintentional. One element of unintended dishonesty is well known: Even when an Indian government legitimately works to accomplish a massive task, it typically fails.
Start with the National Rural Employment Guarantee Act (NREGA), the key existing effort to aid the rural poor. NREGA is more than a decade old and the last two governments have poured resources in. Yet this budget features new and separate programs to provide financial support and health care to most of the same people NREGA was intended to help.
Another valued goal of the last few national governments has been to improve infrastructure. Yet the future spending requirements are always rising. Every few months there are reports of the large number of late and over-drawn projects, but the problem extends further. The National Investment and Infrastructure Fund, for example, is close to a complete failure.
The budget itself is arguably the worst instance of central governments vowing to do something, then failing. This can even be a positive — excessive subsidies were promised for the previous fiscal year 2017–18 but not paid out, which kept the deficit from exceeding 4% of GDP.
Nonetheless the 2017–8 budget was terrible, not as much for the country as Delhi’s credibility. It’s a very serious matter that India claims to be growing quickly, leaving no macroeconomic justification for budget deficits, yet it still borrows heavily. Adding to that, the present government seems to have little idea what it’s doing fiscally.
Much attention is being paid to the first estimate of a deficit of 3.2% of GDP rising to 3.5%. Breaking down the numbers is more discouraging. To the government’s credit, it publishes the bad news. The core of the problem is found in what is termed the effective revenue deficit. This was supposed to be 1.26 trillion rupees, or 0.7% of GDP.
That now seems too low by half. The new version of the 2017–8 effective revenue deficit is almost 2.5 trillion rupees, 1.5% of GDP (GDP was short of projected). The rest of the budget mess flows from this, with a one-time maneuver — capital receipts revised sharply higher to exactly 1 trillion rupees — used to dampen the effective deficit failure.
As the government initially did with the 2017–8 budget, it claims the effective revenue deficit will drop in 2018–9. But, in light of the near-100% error just a year earlier, why would anyone believe that?
The record to date thus indicates three possible paths for the Modi government’s populist salvo. First, as with infrastructure plans, the programs will turn out not to be designed to have anything like the impact advertised.
Second, the government will indeed strive for truly grand outcomes, only to find it has nothing like enough money. The 2017–8 budget turned out painfully bad, the government now touts two sweeping new programs, yet the fiscal situation is supposed to improve. “And then a miracle happens” is not a good approach to budgeting.
Least likely, Delhi will borrow enough to guarantee returns to most farmers and basic health care to hundreds of millions, without cutting back massively elsewhere (there is no acknowledgement this may be needed). India would then become the first “fastest-growing major economy” to walk right into a debt crisis. The Modi government just went the wrong way.
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