Arun Jaitley, the Indian Finance Minister, unveiled his fourth budget for fiscal year 2017-18 on 1st February which envisages a massive rise in expenditure for the rural economy with the objective of doubling farmers’ income and strengthening India’s crumbling infrastructure (including irrigation, roads, education, etc), as well as provide tax cuts to small and medium sized businesses (5 percent). Providing cheap housing as well as abolishing the tax on those earning less than 3 lakh rupees per annum were other major components of the budget that fuelled the perception that this was a pre-election budget.
The Indian budget has announced raising farm credit by a massive one lakh crore rupees within the next five years to reach 10 lakh crore rupees and the crop insurance scheme launched last year with a budget of 5,500 crore rupees has been allocated 9,000 crore rupees in 2017-18. The projected growth rate for the Indian farm sector in 2017-18: 4.1 percent.
In Pakistan last year, crop loan insurance received 600 million or 60 crore rupees while this year the budgeted amount is lower at 500 million or 50 crore rupees in spite of the fact that weather conditions due to climate change factors are increasingly negatively impacting on our crop output. Unfortunately, the September 2015 more than 340 billion rupee farm incentive package announced by Prime Minister Nawaz Sharif has not been implemented which accounts for a negative 0.2 percent growth of the sector in 2015-16 (July-March as per the Economic Survey).
Criticism of the Indian budget was, however, focused on the lack of targeted incentives to attract investment – foreign as well as domestic – though all were agreed that digitization supportive measures envisaging 745 crore rupee incentives would promote electronic manufacturing in the country. The budget also envisages the expansion of high-end high speed broadband (through allocation of 10,000 crore rupees) to reach more than 150,000 panchayats as well as deploying free Wifi to 1050 villages; and to begin Digi Gaon programme designed to promote tele-medicine and education. The Indian budget also proposed that IT giants, including Infosys and TCS provide core banking support to co-operative banks. These are significant pro-digitization measures that could change the way rural largely illiterate India interacts with corporate Indian as well as the rest of the world. In sharp contrast, the Ishaq Dar-led Finance Ministry has focused on this sector as a source of revenue with an estimated 34 percent overall tax imposed on this sector. In addition, the Universal Service Fund, a dedicated fund set up to be used for expanding the service to un-served and underserved areas is being credited to the consolidated fund since Dar was given the Finance portfolio.
India’s defence budgetary allocation, of great interest to Pakistan, was increased by 5.6 percent in the forthcoming year; however, it was pointed out that this allocation makes it the lowest ever component of the Gross Domestic Product (GDP). In the latest Indian budget, defence allocation implies 1.62 percent of GDP while China’s is reportedly 3 percent of GDP. Pakistan would have to raise allocation by more than double to match India’s defence allocation as a percentage of GDP which would place a great burden on our already poor performing macroeconomic indicators.
In terms of macroeconomic indicators, there is no longer any comparison between India and Pakistan. The Indian budget envisages the abolishment of plan and non-plan expenditure with the focus on capital expenditure to the tune of 25.4 percent. The Indian proposed budget deficit for next year is 3 percent for three years with a deviation of 0.5 percent and revenue deficit of 1.9 percent. Indian foreign debt is 1.5 percent of GDP and the 2017 N K Singh Committee report recommended revising the Fiscal Responsibility and Budget Management Act 2003 – to increase fiscal deficit targets given the rise in debt of banks and corporate sector that would necessitate stimulation through government expenditure.
In this context too, it is unfortunate that Pakistan’s Ministry of Finance is focusing on borrowing from bilaterals and multilaterals as well as raising money through issuance of Eurobonds and sukuk at rates well above the global average to manage its fiscal deficit; and during the three years of the Sharif administration’s tenure there was a focus on shoring up foreign exchange reserves with foreign borrowing but with the cessation of budget support from multilaterals/bilaterals subsequent to the end of the International Monetary Fund programme in September 2016 there has been a significant rise in borrowing from the external commercial banking sector at high rates of return resulting in net outflows rather than inflows by December last year. At the same time overvaluation of the Pakistani rupee accounts for declining exports and foreign direct investment which has been declining in spite of the start of the China Pakistan Economic Corridor. The result: India’s growth rate is more than double Pakistan’s rate of growth.
The Indian budget also envisages a growth rate between 6.75 and 7.5 percent next year (with growth rate for the first eight months of the current year at 7.1 percent which would be lower for the year subsequent to the flawed decision to demonetise the currency notes). In contrast, Pakistan’s flawed economic policies together with massive data manipulation give a growth rate of 5.7 percent for this year which is not supported by government data as well as the multilaterals.
To conclude, it is imperative for the Pakistan government to abandon its focus on reducing the fiscal deficit by enhancing outlays on capital expenditure. This would require rationalising data and not doctoring it to show a better performance than is in fact the case as it disables the Ministry of Finance to take informed policy measures in the budget.