For sometime now, I have been coming across scores of articles by noted economists and recognised columnists, who have been concerned over the fiscal health of the economy. Their concerns are not just restricted to the growing fiscal gap, but more than that, to how the Finance Ministry has been ‘window dressing’ the entire fiscal deficit. In his Budget speech this time, Finance Minister Mr. P. Chidambaram had stated that for the current year, the revenue deficit would be 1.4 per cent of the GDP, against the budgeted estimate of 1.5per cent; and the fiscal deficit would be 3.1per cent of GDP, against the budgeted estimate of 3.3 per cent. He went on to state that for the year 2008/09, the fiscal deficit is estimated to be around only 2.5 per cent of the GDP. He claimed all this amidst roaring applause and also stated that he would not only achieve the targets for the fiscal deficit under the Fiscal Responsibility & Budget Management (FRBM) Act, but would also be left with some headroom. Most economists have been expressing increasing concerns on these figures themselves.
What has been bothering most economists is the kind of ‘off the budget’ adjustments that have been made by the Ministry of Finance to make the fiscal deficit figures look attractive. No doubt, the deficit looks in a much better shape than what it used to be even some years back, but then, most of it has been on account of upsurge on the revenue side, owing to robust tax collections; at the same time, there has been hardly any discipline on the expenditure front. That has been a point of concern for most experts, apart from other deficits, which have been mounting and which the Ministry of Finance has deliberately kept out of public discussion. As per some reports, the off-budget liabilities (oil and food bonds) in themselves aggregate almost 1 per cent of the GDP! Further, on the expenditure side, when the Finance Minister stated that the non-plan expenditure for the ensuing year would be Rs.5,07,498 crores, he did not take into account the ensuing liability on account of the recommendations of the Sixth Pay Commission! Even on a conservative estimate, this liability would not be anything less than Rs.25,000 crores annually. Add to this the burgeoning oil subsidy bill on account of the rising price of crude oil vis-à-vis the political compulsion of the government to increase the price of fuel. For the last financial year, the total under recovery of public sector oil companies was nearly Rs.90,000 crores; and for this financial year, one should not be surprised even if this figure touches Rs.200,000 crores, given the breakneck speed at which the price of global crude is heading upwards. Not just this, the populist farm loan waiver of Rs.60,000 crores, which was eventually raised to Rs.70,000 crores, has also not been taken into account. And if each of these is taken into account, then the expenditure would go up by not less than Rs.100,000 crores – that too only if the burden of loan waiver and oil subsidy is divided over a few years. And in this case, the fiscal deficit would be far more than what is being projected.
My contention here is to do with such compulsions that the Ministry of Finance is currently facing. Going back in time, one would realize that the entire issue of fiscal prudence acquired importance way back in the year 1991, when India had to borrow funds from IMF. Under IMF’s structural adjustment programmes, fiscal management had been – and continues to be – one of the pivotal issues. And it is since then that policy makers and economists have been asserting heavily upon the concept of fiscal management; a concept that has only grown in importance year after year! To a most unfortunate point today, where the pressure for fiscal management is so high (a fact many economists don’t even realise), that the Ministry has to actually resort to a path of fudging accounting, which it otherwise would not have done.
It is needless to state that the Indian economy is unique – so its policy prescriptions also have to be likewise. Yes, the government should essentially control those expenditures that, though being targeted towards the poor, did not result in them getting the benefits. But in reality, the government should essentially spend as much as possible on the poor, without bothering much about the fiscal deficit. Historically, it has been observed that most economies, during their development stages, have never bothered much about expenditure and the resulting deficits. In fact, one of the ways to grow faster and take care of important social investments is through a fiscal deficit. Consequent growth and the resultant increase in purchasing power take care of the negative effects of the fiscal deficit. The Chinese miracle is a classic case in point, wherein during the 70s and 80s, they didn’t bother much about deficits and made investments in such a manner that they could pull out millions of poor from poverty. The same could be said for the US as well, where, in the 30s and 40s, and similarly during the 70s, respective US Presidents did not put deficits over expenditure. Similarly, in our case too, it is pertinent for the government to make expenses to build social infrastructure and arrest all other expenses that do not add to development. And to this effect, the government should not suffer from any complexes while doing so. For nothing can be more unfortunate than a government that – quoting an ostensible reasoning of fiscal management – fails to build social infrastructure and development! Having said that, the bigger question that should worry economists is not whether we are having a little higher fiscal deficit… It should be, is the fiscal deficit being used for the right kind of social initiatives?
What has been bothering most economists is the kind of ‘off the budget’ adjustments that have been made by the Ministry of Finance to make the fiscal deficit figures look attractive. No doubt, the deficit looks in a much better shape than what it used to be even some years back, but then, most of it has been on account of upsurge on the revenue side, owing to robust tax collections; at the same time, there has been hardly any discipline on the expenditure front. That has been a point of concern for most experts, apart from other deficits, which have been mounting and which the Ministry of Finance has deliberately kept out of public discussion. As per some reports, the off-budget liabilities (oil and food bonds) in themselves aggregate almost 1 per cent of the GDP! Further, on the expenditure side, when the Finance Minister stated that the non-plan expenditure for the ensuing year would be Rs.5,07,498 crores, he did not take into account the ensuing liability on account of the recommendations of the Sixth Pay Commission! Even on a conservative estimate, this liability would not be anything less than Rs.25,000 crores annually. Add to this the burgeoning oil subsidy bill on account of the rising price of crude oil vis-à-vis the political compulsion of the government to increase the price of fuel. For the last financial year, the total under recovery of public sector oil companies was nearly Rs.90,000 crores; and for this financial year, one should not be surprised even if this figure touches Rs.200,000 crores, given the breakneck speed at which the price of global crude is heading upwards. Not just this, the populist farm loan waiver of Rs.60,000 crores, which was eventually raised to Rs.70,000 crores, has also not been taken into account. And if each of these is taken into account, then the expenditure would go up by not less than Rs.100,000 crores – that too only if the burden of loan waiver and oil subsidy is divided over a few years. And in this case, the fiscal deficit would be far more than what is being projected.
My contention here is to do with such compulsions that the Ministry of Finance is currently facing. Going back in time, one would realize that the entire issue of fiscal prudence acquired importance way back in the year 1991, when India had to borrow funds from IMF. Under IMF’s structural adjustment programmes, fiscal management had been – and continues to be – one of the pivotal issues. And it is since then that policy makers and economists have been asserting heavily upon the concept of fiscal management; a concept that has only grown in importance year after year! To a most unfortunate point today, where the pressure for fiscal management is so high (a fact many economists don’t even realise), that the Ministry has to actually resort to a path of fudging accounting, which it otherwise would not have done.
It is needless to state that the Indian economy is unique – so its policy prescriptions also have to be likewise. Yes, the government should essentially control those expenditures that, though being targeted towards the poor, did not result in them getting the benefits. But in reality, the government should essentially spend as much as possible on the poor, without bothering much about the fiscal deficit. Historically, it has been observed that most economies, during their development stages, have never bothered much about expenditure and the resulting deficits. In fact, one of the ways to grow faster and take care of important social investments is through a fiscal deficit. Consequent growth and the resultant increase in purchasing power take care of the negative effects of the fiscal deficit. The Chinese miracle is a classic case in point, wherein during the 70s and 80s, they didn’t bother much about deficits and made investments in such a manner that they could pull out millions of poor from poverty. The same could be said for the US as well, where, in the 30s and 40s, and similarly during the 70s, respective US Presidents did not put deficits over expenditure. Similarly, in our case too, it is pertinent for the government to make expenses to build social infrastructure and arrest all other expenses that do not add to development. And to this effect, the government should not suffer from any complexes while doing so. For nothing can be more unfortunate than a government that – quoting an ostensible reasoning of fiscal management – fails to build social infrastructure and development! Having said that, the bigger question that should worry economists is not whether we are having a little higher fiscal deficit… It should be, is the fiscal deficit being used for the right kind of social initiatives?
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