India's annual budget was once the country's most important economic event, but times have changed as Central Government reforms no longer need adhere to budget timelines.
There was a time when the Indian government, officially known as the Union Government or the Central Government, had a monopoly on most of the important sectors of the economy, from power generation, oil and metal production to telecoms and airlines, making the presentation of the government's budget an important economic moment.
However, the Central Government's role in the economy has shrunk dramatically, and its spending as a share of gross domestic product is near 40-year lows. In fact, state governments, put together, now spend nearly 60 percent more than the center, versus just 6 percent more at the start of this decade. Yet, media hype around the Union Government's budget persists, while state budgets go mostly unnoticed.
An exceptional budget
This year's Union budget was an exception, however, and deserved some attention for three reasons.
First, the fiscal bonanza for the Central Government from weak crude oil prices (the Union Government kept most of the gains by cutting subsidies and raising taxes: prices at the fuel pumps did not fall as much) created room for a fiscal stimulus that was desperately needed given persistent weak growth in the economy. The government did deliver a 1.5 trillion rupee (around $23.9 billion or 1.1 percent of GDP) increase in plan expenditure, mostly on roads and railways, even if it meant pushing out the fiscal consolidation targets by a year.
Secondly, the government's acceptance of the unprecedented increase in statutory tax transfers to states recommended by the Finance Commission meant that despite a 16 percent increase in gross tax receipts, the Central Government's net receipts increased just 1 percent. While this was offset by reductions in other transfers, the net increase in transfers to state governments was 1.4 trillion rupees. Thus, state budgets will become even more important.
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Lastly, as the government does cash accounting (as against accrual accounting that companies do), writing a check in April versus writing it in March can change the fiscal deficit. We estimate a fiscal deficit of more than 1 percent of GDP was pushed from the previous fiscal year into the current one (the year ending March 2015), necessitating a sharp contraction in discretionary spending. This spending cut, concentrated in the last few months of this fiscal year, is likely the cause of economic momentum worsening in the past 4-5 months.