Events & Issues
New Delhi ,9 April 2012
Fiscal Deficit
CAN FM TACKLE CHALLENGE?
By Dhurjati Mukherjee
There has
been much discussion on curbing fiscal deficit because of its adverse impact on
the economy. Higher inflation and reduction in private investment have been
some of the problems arising out of what is termed as ‘fiscal profligacy’. However,
for a country like India,
where developmental activities in the form of infrastructure upgradation and subsidies
for the poor need to be provided, curbing the fiscal deficit is indeed a big
problem.
On the
other hand, to get back to a high growth path coupled with low and stable
inflation, the Government would need to reiterate its commitment to credible
fiscal consolidation. In this connection, the resent Budget gains significance
though there has hardly been any attempt to curb expenditure. Will Finance
Minister Pranab Mukherjee be able to carry out his plans or will he be forced
to rethink, is the big question.
Before
going into the budget proposals, one may note that the Medium Term Fiscal
Policy of the 13th Finance Commission, which forecast a zero deficit budget by
2013-14, is unlikely to be achieved. The policy had made it clear that what is
needed is “expansionary fiscal contraction”, focusing on expenditure
prioritizing. But there has been very little effort to curb government
expenditure, specially in unproductive areas.
It would
be pertinent to point out the need for rationalizing of staff in all Government
departments, which includes officers as well. Moreover, work that could be
carried out effectively and efficiently by young professionals, through
outsourcing on contract basis, is being carried out by retired persons lacking
skill and the energy to perform!
It is
generally agreed that the present fiscal year (2012-13) is expected to be
better and bring about decent economic growth with macro-economic stability.
The cyclical corrections are thus likely to be addressed to the form of
increased revenue receipts.
However,
the issue of increasing subsidies still remains, which is quite natural. Two
things are of vital importance – one, the fact that subsidies cannot be
curtailed to the extent the neo liberalists want as the poor needs these and
second, the country imports around 80 per cent of its oil requirements, a huge
part of which has to be subsidized. It is rather easy to say that subsidies
need to be brought down but keeping in view the welfare objectives, or
obligations, of the State, this is indeed a challenging task before the
government.
Minister Mukherjee
has pledged to lower the fiscal deficit to 5.1 per cent of the GDP in 2012-13
from 5.9 last fiscal. In the future, he pledged to keep subsidies below 2 per
cent of GDP – and reduce the same to 1.75 per of GDP over the next three years, which may be difficult to achieve,
specially given the expenses on the Government’s food security programme that
is expected to start. Moreover, a decline in the fuel subsidy bill by as much
as Rs 24,901 crores – a cut of about 36 per cent -- may not be a realistic
target even if fuel prices remain static. The decontrol of diesel, as
envisaged, may face stiff opposition from the allies of the UPA and, as such,
the assumption of Rs 43,600 crores towards subsidy may cross Rs 60,000 crores
on a rough estimate.
Though
Mukherjee assured he would foot the entire bill for food security, while
raising food subsidies a little over Rs 2000 crores to Rs 75,000 crores in
2012-13, the saviour for the Government is that the Bill may not turn into law
before the Winter Session of Parliament. But even then, the introduction of the
programme this fiscal, in a limited way, is certain to keep the fiscal deficit
calculations go wrong. When the actual implementation takes place in 2013-14,
the deficit cannot be brought down, about which most experts are unanimous in
their opinion.
It is
significant to point out here that the Government has for the first time used a
subtle trick to depress its revenue under the Fiscal Responsibility &
Budget Management (FRBM) Act by almost 47 per cent. Calling it ‘Effective
Revenue Deficit’, a portion of the revenue expenditure has been shown as grants
for creating capital assets. Interestingly, the 13th Finance Commission
recognized the definitional refinements in respect of revenue deficit and
grants for creation of assets as capital grants. In the process, the effective
revenue deficit has gone down to 1.8 per cent of the GDP, giving Pranab
bragging rights to claim that he has put the country on the road to fiscal
consolidation.
According
to a section of economists, public finances in the country are in a relatively
good position. The debt/GDP ratio stands at 6.3 per cent and the
interest/budgetary receipts at 31 per cent. These measures and not so much the
fiscal deficit are the judicious ways to assess financial position of the
economy. For having navigated the economic crisis in India,
this is much better than comparable economies such as Brazil, Russia
and China.
In terms
of absolute growth, India
has grown at a CAGR of 7.7 per cent since the recession began in 2008 while Brazil has grown at 3.9 per cent and Russia 1.3 per
cent. China,
while growing faster, piled unsustainable levels of debt and in doing so its
debt/GDP stands at 155 per cent now and is likely to hit 200 per cent by 2016
or $ 22 trillion. India
has grown while decreasing debt and interest ratios sharply.
In the
current fiscal, India’s
market borrowings would be around 5.6 per cent of GDP (Rs 569,616 crores),
which is quite high and may put pressures on monetary, liquidity and debt
management. But considering the needs of a growing economy, this possibly
cannot be avoided to keep pace with developmental momentum.
One
cannot deny the fact that keeping in view the huge developmental activity being
carried out, public finances are in relatively good shape and the Finance
Minister would be able to gear the economy towards at least 7.5 per cent growth
this fiscal. However, to keep the momentum of growth, cutbacks in expenditure
may be counter-productive. Even developed economies such as Japan (208 per cent), Canada
(83.5 per cent), UK (79.5
per cent) and the USA (69.4
per cent) have higher public debt to GDP ratios as do emerging economies like Brazil (54.4
per cent).
Though
fiscal consolidation may have suffered, it is expected that some methodology
would be evolved to ensure that the fiscal deficit does not cross 5 per cent of
GDP. However, nothing magical can be expected in a given frame of time. ---INFA
(Copyright, India
News and Feature Alliance)
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