Economic Highlight

New Delhi, 1 April 2011

Higher Deficit

GROWTH MAY GET STUNTED?

By Shivaji Sarkar

A tsunami may be awaiting the Indian economy. A Budget showcased for political purposes conceals more. It does not reveal that the Government estimates are based on the surreal if not unreal.

It also does not speak that the so-called growth is based on high deficit, unreal crude price expectations, unaffordable though sometimes necessary largesse, falling investments and also does not take into account the impact of a high inflation and interest rates.

The country has a compound inflation rate of about 15 per cent during the last two years. The Reserve Bank Deputy Governor in-charge of monetary policy Subir Gokarn, says he is concerned as not only food inflation but even non-food manufacturing inflation has risen to 6.1 per cent in February from 4.8 per cent in January.

This suggests that producers are passing on the rising input and investment costs spurred by higher food inflation and interest rates to the consumers. Gokarn agrees that inflation figures are a big worry for achieving the growth target of 8.6 per cent.

The RBI panacea is to counter it with a further interest rate hike. As that would fuel general inflation so another dose of interest rate rise would be the prescription. The prescription would lead to fall in investments and higher deposit rates would attract higher bank deposits. Lending cost would rise and so again the cycle of inflation-interest rate would continue ultimately making Government borrowings expensive.

This has led to even higher cost of corporate borrowings and the Indians appetite for more funds has made external commercial borrowings costlier. The Chairman and Managing Director of the National Hydro Power Corporation (NHPC) ABL Srivastava avers international borrowing is “not a cheaper option for us”.  

Importantly, in all likelihood, the deficit target would be unachievable. The expenditures side is a big worry. Last year, the Government had a deficit of 5.1 per cent. If the 3G auction revenue is excluded it would be close to 6.5 per cent. The target for the current year at 4.6 per cent is far from being realistic.

The proposed disinvestments again are doubtful in the volatile global stock market scenario amid political tensions in the Arab world, financial crisis in Europe and a meltdown in Japan. The Mumbai sensex has given one of the lowest returns in the financial year 2010-11 at 11 per cent. The market is more in a selling mood than buying.

Besides, industrial production has turned critical as per the industrial index. The automobile sector growth may get stymied as indicated by the move of Honda to cut car production at its Noida unit due to supply constraints of components following the earthquake and tsunami in Japan.

The trends may lead to shortfall on the revenue side. The question again would be whether the Government would be able to restrict itself to the projected deficit of 4.6 per cent of Rs 343,00 crore. The targets are likely to be exceeded.

Significantly, the deficit figures are dependent on a 9 per cent GDP growth. This is an ambitious figure and most independent forecasts hover around 8 per cent. This growth, if at all real, was driven by deficit spending. The fiscal deficit, in reality, doubled, during the past few years from 3 per cent of the GDP to 6 per cent --- an increase of about Rs 2.5 lakh crore.

In short, almost 3 per cent of the GDP growth came from higher Government spending --- larger stimulus for corporate, backed by borrowings from the market.

The Government is almost repeating the profligacy of the US Government and its economy both before and after the sub-prime crisis.

The country’s overall debt level has increased from 72 per cent of the GDP to 78 per cent over the last two years. Higher debt is a risk. The country needs to learn from Ireland, Greece, Portugal, Dubai and Japan. It reduces the economic flexibility to withstand any future economic and financial shocks --- a large possibility in the present global scenario.

The fundamentals are projected to be strong. It is not so. The Government is faced with the challenge to meet its political goals for programmes like the MNREGS, food security, rural spends, social security commitments and education for all.

The budgetary figures are based on an assumed oil price of $ 84 per barrel. But the price is hovering over $ 100. This has an impact on deficit. It is estimated that borrowing requirements would increase by Rs 36,000 crore for every extra $ 10 in oil prices. Thus, deficit is bound to increase to new highs.

But this time the earlier cushion of a low interest regime is missing. This would have a telling effect on the overall scenario. Coupled with this is the unpredictable monsoon and climate change. It may lead again to a severe price situation particularly amid reports of a yellow rust fungal disease affecting the wheat crop in Himachal, UP and other northern States.  

Undoubtedly, the growth story is passing through a difficult phase. When the country achieved the 8 per cent plus growth as per projections, it rode on the low interest regime of 5 to 6 per cent. The acceleration happened on a lag of about three years of low-interest regime. The deceleration too may take time to reflect but it is likely to be less than the process of acceleration. The fall is faster than climbing up.

Falling investment is also bad news. Corporates are getting squeezed as individual taxpayers are. Jobs are not coming up. Earnings through corporate sales or lesser jobs would possibly face slowdown. It needs to be noted that 80 per cent improvement in tax to GDP ratio so far has come from the corporate sector. This is likely to get hit affecting bottom-lines of Government finance.

The Government has to look for policy makers whose objective is not myopic short-time achievement. A policy overhaul tailoring the short-time goals with a long-term perspective is required. The Planning Commission was supposed to do it. It may now be replaced with a real think tank. Growth as of now is doubtful.

The country is having an unreasonable policy looking for extreme short-time propagandist solutions. If it is not corrected, it would not be late to slip into a Europe-type crisis. The present growth story may get moth-eaten unless bold policies with a perspective are adopted. It requires a political will. Does the country have it? ---- INFA

(Copyright, India News and Feature Alliance)