Economic Highlights

New Delhi,2 August 2013

Eddy Of High Deficit

HOW WILL GOVT PAY SALARY?

By Shivaji Sarkar

The latest Reserve Bank of India (RBI) assessment of the economy is scary. Not because it shows every aspect of the economy touching new lows, but the biggest concern is the alarming fiscal deficit and falling rupee.

Notably, this is gradually leading to a situation where the Government might find it difficult to meet normal commitments. Further, if this further aggravates even paying Government employees their salaries may not be easy. Arguably, if to pay that, the Government resorts to larger borrowings it would further affect liquidity and make credit more expensive. Resulting in further slow down and galloping inflation.

Moreover, the announcement of a new Telengana State at this time, for limited electoral gains, would further erode Government finances. Remember, small States, except one or two, have not come as boon to people. It has also been observed that smaller the State, be it Jharkhand or Uttarakhand, higher is the corruption. Wherein, a nexus develops easily leading to siphoning of Government funds.

Another imprudent decision is allowing Air India to secure $500 million loan from Deutsche Bank and British Invstec Bank. Air India is not in a position to repay this, but it has been given the loan on the Government’s assurance of guaranteed bond. In other words, the Government would have to repay it. How would it do this? It is already, suffering a high current account deficit.

Pertinently, the Food Security Ordinance is an admission that 67% of the people in the country are facing increasing disparity, as pointed out by the latest National Sample Survey Organisation study on consumption spending.

True, the Bill might be necessary but it is also an admission that governance has failed and people do not have purchasing power. In fact, not only would the Food Bill further add to the fiscal deficit but also cause immense harm to the rural economy.

Thus, the country would be in a vortex of indecision with inflation and rural inflation becoming all pervading and an election issue.

Think. The Central Government’s gross fiscal deficit stands at 48.4%, Rs 2.63 lakh crore or almost half of the gross budget estimates, Rs 5.42 lakh crore at the end of June 2013 as compared to 37.1% in the corresponding period last year. Plainly, by October, the budgetary deficit estimates would be crossed and by March 2014 borrowings could cross Rs 10 lakh crore!

Significantly, the primary deficit increased to 117.2% compared to 67% the previous year. Simply put, tax accruals are reaching critical levels which are not unlikely given the fall in revenue receipts. The total receipts during April-June were Rs 1.19 lakh crore or 10.6% of the budget estimate for 2013-14, while expenditures was Rs 3.82 lakh crore or 23% of the estimates, according to data collated by the Controller General of Accounts.

As it stands, the current account deficit (CAD) is a concern. Consequently, these ailments are reflected in the rupee falling to Rs 61 to a dollar level.

Alas, Finance Minister P Chidambaram has once again come out with his hackneyed prescription of opening up more avenues for foreign direct investment (FDI) and bonds for NRIs. In reality, these are disguised borrowings which would burden future generations.

Clearly, the Government is suffering on two counts: Inflation and lack of vision. It has not been able to think out of the box. Had it the vision, it would have made drastic administrative and policy moves to control inflation. Worse,  some bureaucrats suggested that inflation would help producers (which one?) get better prices and some even recommended not to bother about inflation as “growth” would take care of it.

None happened. Growth has become a misnomer. All industrial indices are decelerating. The core infrastructure grew 0.1% in June as compared to 2.3% in May 2013. The decline in the growth rate in June was mainly on account of negative growth witnessed in coal, crude oil, natural gas and electricity production.

All these are critical. Less production and minimal use of energy points to the grim reality that industry and the manufacturing sectors are virtually at a non-functional level.

So who would pay taxes? Large tax payers have now reduced capacity to pay this. Only individual salaried people are being extorted whereby taxmen are even taking a pick of people’s bank deposits, something they have saved after paying hefty taxes. Resulting in a cascading effect.

Further, inflation has reduced the capacity of individuals to have purchasing power along-with erosion in their savings thereby impoverishing them. Questionably, if individuals do not go to markets how will bazaars prosper or the country have growth?

Additionally, it has increased Government expenses by over 20% not only in terms of project costs but also in terms of daily expenditure. The salary bill is increasing by over 15% a year, despite Chidambaram’s assertion that he would manage to contain deficit to the budgeted projection of 4.9%. This is difficult.

There is only one possibility as the RBI has pointed out. It says 566 Central projects are delayed for lack of funding. These could be delayed more. Though it would have cost overrun, this might window dress budgetary figures. As a result, the country’s woes would increase, there would be less development, fewer jobs and but large Government “savings”.

This is what industry leaders told Prime Minister Manmohan Singh recently. The moot point: The Government has to decide whether it should save or spend? The industry wants the Government to take a lead in creating an atmosphere for investment and growth.

This translates to a lot. The Government would have to pay attention to agriculture. It has to counter cheap Chinese imports by creating a strong but inexpensive manufacturing base. It also has to take steps at stopping exports of minerals and other raw materials, given that within WTO; the Government has powers to do this. All it needs is the will to do this and not buckle under Chinese machinations at the Tibetan borders.

In the ultimate, the fight for resuscitating the rupee has to come from strengthening the domestic sector. Much can be done with pragmatic decisions. Japan and China have maintained their currencies at high level not for external reasons but for their strong domestic strength. ---- INFA

(Copyright, India News and Feature Alliance)