Indian Finance Minister Arun Jaitley in his budget 2015 sought to fuel growth through not only slowing the pace of the earlier targeted reduction in fiscal deficit but also through attracting foreign and domestic investment by amending the residency requirements of foreign companies as well as massive budgeted increase in infrastructure investment.
In marked contrast, the Pakistani budget for the ongoing year envisaged a reduction in deficit to 4.9 percent, (given the fact that Pakistan is on an International Monetary Fund programme the government's flexibility in manipulating this target is considerably less than that of the Indian government), borrowing heavily from abroad to fund current expenditure (misrepresenting the 3 billion dollars generated from Eurobond and sukuk as capital market transactions instead of enhanced external borrowing), and a slash in federal development expenditure by 9 percent and combined provincial development expenditure of around 32 percent till the end of December 2014. These policies, economic theory dictates, would compromise growth severely and what is relevant to note is that these policy decisions do not consider the other two major deterrents to growth in Pakistan namely the continuing poor performance of the power sector as well as law and order problems.
In the Subcontinent context two mitigating factors need to be appropriately tackled by incumbent governments that may run contrary to sound economic theory. First and foremost poverty levels are high and resources scarce, which accounts for pro-poor programmes that include subsidies as well as social safety net programmes. PML-N government continued the two security net programmes that it inherited namely massive subsidies extended to the power sector, accounting for over 90 percent of all subsidies in any given year, and the Benazir Income Support Programme. The government committed to the IMF that it would reduce subsidies, considered from an economic perspective as an inefficient use of scarce resources, however, our budgets for the past seven years show a budgeted decrease in subsidies to the power sector yet by the end of the year the figure is nearly doubled from what was budgeted because of failure to control the inter-circular energy debt. Thus a decline in the international price of oil did not lead to any reduction in subsidies because of high inefficiencies in the power sector and the government's major policy thrust to deal with these systemic inefficiencies was to raise the price of electricity. In marked contrast to India subsidies declined from 12 percent of the budget 2014-15 to 10 percent in the current year's budget.
Pakistan's BISP was generally well regarded by foreign donors during the PPP-led coalition government and Farzana Raja had sought its expansion to include training/education, as well as micro loans to set up business - or in other words enabling the beneficiaries to graduate out of receiving small monthly handouts to becoming economically active members of society. It is unfortunate that in two years the government has appointed two chairpersons and neither of them are long-term loyalists of the party reflecting the importance given to BISP. Be that as it may, the government increased budgetary allocation of the programme from 70.28 billion rupees in the revised estimates of last year to 97.15 billion rupees in the current year though one assumes it is telling that in 2013-14 the government had actually budgeted 75 billion rupees for BISP. India provides food subsidy and the Modi administration earmarked 124,419 crore rupees in the next fiscal year as against 122,675.81 crore rupees in the revised estimate of the current fiscal year. Of this total food subsidy, nearly 65,000 crore rupees is for implementation of National Food Security Act (NFSA).
And secondly, defence spending has been high in the two countries because of the security concerns that each country perceives against the other though the Modi government rhetorically at least maintains that higher defence expenditures are focused on neutralising what it perceives as the Chinese threat. This is supported by recent events after Modi took over power that fuelled Chinese concerns. First, Chinese media noted that the exit of Mahinda Rajapaksa, a man that India had a difficult relationship with, and the electoral victory of Maithripala Sirisena as the President of Sri Lanka, was supported by the Indian government and this change is perceived as a blow to Chinese interests. It may be noted that the new Sri Lankan government committed to a review of the construction of the Chinese-backed port close to Colombo, "citing issues over transparency in the contract and environmental reasons". China had also docked its submarine in Sri Lankan port under Rajapaksa. And secondly, China lodged a strong protest against Modi's visit to Arunachal Pradesh after taking office as it is a border region claimed by both countries. In this context India raised its defence expenditure by one percent of the total budget in 2015-16 and committed to spending 11 percent on defence. Be that as it may, the Pakistani defence establishment has pointed out that the identified purchases by the Indian defence forces are more Pakistan specific rather than China specific, which prompted the Sharif administration to state that the needs of the defence forces would be met in the forthcoming budget. To keep up with Indian defence allocations given its much larger GDP one would assume that Pakistan would have to spend nearly double yet 17 percent allocation in the current year's budget also includes operation Zarb-e-Azb, which is refundable under the United States Coalition Support Fund.
India spends 10 percent of its total budgeted allocations on interest payments - mainly domestic borrowing - while Pakistan's 33 percent is a source of serious concern. Ishaq Dar has consistently maintained that he is borrowing from abroad to pay back the IMF loan incurred by the PPP-led coalition government, however, this claim falls by the wayside given that Dar does not include sale of 2 billion dollar Eurobonds at rates as high as 7.5 and 8.5 percent per annum as well as one billion dollars of sukuk at 6.5 percent without taking account of even a conservative estimate of annual rupee depreciation till maturity (to date the Finance Minister has kept the rupee dollar parity at around 100 artificially much to the chagrin of the IMF and exporters).
Other major differences between the two countries' budgets are with respect to social sector allocations. The Modi administration has budgeted 11 percent for the implementation of the central development plan and another 9 percent on assistance to states and UT governments. While the central plan would receive the same percentage as last year yet assistance to states and UT has been slashed from 15 to 9 percent while non-plan assistance has been raised from 3 to 5 percent. Part of this decline may be attributed to Modi's decision to replace the Planning Commission with National Institution for Transforming India with membership from all the states though the secretariat would answer directly to the Prime Minister. The budget envisages raising the infrastructure development programme by 11 billion rupees to a whopping 700 billion rupees, with 5 new mega power projects of 4000 MW capacity each in the plug and play mode as well as the continuation of the rural development programme spearheaded by Congress (I) and much criticised by the BJP when in opposition, with an additional 50 crore rupees.
To meet its revenue targets to fund expenditure would require a 9 to 10 percent growth rate, according to Jaitley. With a decline in income tax expected to decrease collections by 8315 crore rupees but fuel savings that would lubricate the economy, a rise in indirect tax collections (targeted to broaden the tax base as well as dampen private consumption, with more stringent punishment laws on black money stashed abroad, increase in service tax and education cess to 14 percent from 12.36 percent), a reduction in the rate of interest - as an encouragement to private sector borrowing - and more foreign investor-friendly laws are policies targeted to fuel growth rate.
In contrast, Dar justifies his over-ambitious revenue targets that are now routinely revised downwards at least three to four times a year, by maintaining that ambitious targets would generate improved Federal Board of Revenue (FBR) performance. However, over-ambitious revenue targets account for the decision to slash Public Sector Development Programme (PSDP) - 15 percent for federal and 32 percent combined provincial PSDPs as noted above. Unfortunately in Pakistan the tax to Gross Domestic Product ratio remains appallingly poor (due to inability of governments to break the power of influential pressure groups) and the tax structure continues to be labelled as unfair, inequitable and anomalous.
And in spite of rhetoric to the contrary our budgeted growth rate remains a challenge partly as stated above due to a focus on deficit reduction, which is at the cost of growth but also because of investor-unfriendly policies that include: (i) heavy borrowing from abroad to fund current expenditure that is raising the debt servicing annual allocation by leaps and bounds and further shrinking the government's capacity to fund PSDP; (ii) a decline in interest rates to encourage private sector borrowing is being compromised by a massive rise in government borrowing from the commercial banking sector, (iii) failure to bring efficiencies in the power sector with heavy reliance on raising tariffs to meet the cost of inefficiencies, and (iv) lower than the real rupee dollar parity as well as delays in refunds to exporters compromising our exporters earning capacity while overseas Pakistanis investments in the country continue to be held hostage to bhatta groups especially in Punjab.
To conclude it is not yet clear whether the Modi administration's pro-investor thrust would bear fruit thereby also generating greater tax revenues to fund infrastructure development and defence, however, in Pakistan's case there appears to be no policy in place that would take us out of the mire of debt - external as well as internal - fuel growth and enhance export revenue. The only visible policy in place is data manipulation by the Pakistan Bureau of Statistics that administratively is under the Ministry of Finance.
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