Events & Issues

New Delhi, 11 November 2013

CAD India’s Twin Evils

URGENT NEED FOR AUSTERITY

By Col (Dr) PK Vasudeva (Retd)

Fiscal consolidation is as much about slashing Government spending as redirecting these towards more productive investment avenues. Wherein a conscious policy effort is needed by the Centre to live within its means and bring down the fiscal deficit and public debt.

It includes, among other things, efforts to raise revenues and bring down wasteful expenditure such as subsidies. On a larger plain this also includes involving the participation of State Governments in fiscal consolidation.

However, rather than a single Budget announcement, the Government needs to ensure this initiative is planned as a long-term exercise through a fiscal reform road map. Especially against the backdrop of the Government's expenditure being way beyond its revenues thereby forcing it to borrow.

Therefore fiscal consolidation is vital to any type of Government fiscal policy which focuses on elimination of debt. In order for the policy to function properly, the UPA must consider the total cost of essential expenses and identify ways to generate as much benefit from these purchases as possible. This implies creating procedures which help eliminate waste thereby effectively increasing consumption efficiency of goods and services purchased.  

Undeniably, India's twin deficits ---- fiscal and current account deficits (CAD) ---- have been a cause of worry for nearly 30 months now, fuelled by a host of domestic and international factors. Alongside, global uncertainty, choppy policy-making and shortsighted decisions have weighed down the two key macro economic indicators.

Now that the ballooning CAD seems to be coming under control and could even become lower than the Government's estimate and target of $70 billion, there is some reason for hope.

Pertinently, the country’s trade deficit for April-September this year fell to $80.12 billion from $91.81 billion in the same period last year. The trade balance for September is down to $6.76 billion from $17.15 billion last September.

This is not all. Exports are up 11.15 per cent to $27.68 billion from $24.9 billion in September 2012 and imports have come down 18.1 per cent to $34.44 billion. Further, oil imports have slid 5.94 per cent to $13.19 billion and non-oil imports are down 24.19 per cent to $21.24 billion from $28.02 billion in September last year.

Indeed, what is also significant is the sharp decline in gold and silver imports to $0.8 billion in September 2013, from $4.6 billion in September last year. Remember, gold is the largest item in the country's non-essential imports bill and has often been seen as the main culprit in India's ballooning CAD story.

Arguably, the singular obsession with reducing India’s CAD has blinded the economy to its ‘twin’: Fiscal deficit and the CAD is the immediate problem. In fact, Finance Minister Chidambaram was not wrong in noting that this was his “greater worry” in his Budget speech early this year.

At $88.2 billion or 4.8 per cent of India’s GDP in 2012-13, the CAD is the prime cause for the downward spiral of the rupee. Another reason for the fiscal deficit dropping beneath the radar is the relative success in containing it within budgeted limits last year.

Notably, the fiscal deficit for 2012-13 was lower than the budget estimate not only in relative (4.9 versus 5.1 per cent of the GDP) but even in absolute terms (by Rs 23,700 crore). In doing this, a semblance of order seems to have returned to the Centre’s finances, following a period of profligacy that saw its fiscal deficit soar from 2.5 to 5.7 per cent of the GDP between 2007-08 and 2011-12.

Happily today the situation seems to have reversed. Curbs on gold imports, alongside a pick-up in exports since July 2013, make a CAD of below $70 billion an attainable goal. In contrast, meeting the fiscal deficit target of 4.8 per cent looks like an uphill task.

Unfortunately, the Centre’s gross tax revenues have grown by hardly 10 per cent during April-September against a budgeted increase of 19.2 per cent for the entire fiscal. This has been mainly due to a 6 per cent drop in excise collections due to the manufacturing slowdown.

Consequently, the prospects for realising the targeted Rs 80,000 crore from disinvestment and telecom spectrum sales appear bleak. Hardly anything has been raised so far and it is unlikely that much more will be done in this fiscal.

If anything, the fiscal deficit is likely to be reduced mainly by cuts in expenditure. Last year, the Centre spent Rs 81,500 crore less than it had originally budgeted, made up largely of cuts in Plan expenditures. This may be the last resort to prevent the fiscal deficit from breaching Chidambaram’s “red line”, 4.8 per cent of GDP.

The sad part is that such ‘‘expenditure cuts’’ are ad hoc and arise out of the inability of Ministries to spend on things other than salaries, interest payments and other ‘regular’ non-Plan expenditures. While this may help meet deficit targets in the short run, it does not amount to real fiscal consolidation or reform.

Factually speaking, that this is not happening is another symptom of policy paralysis. Recall, the International Monetary Fund had averred in October that India’s fiscal deficit is expected to increase to 8.5% of the GDP this financial year, mainly due to the downward revision in GDP growth, depreciation of rupee and higher global oil prices.

This projection came a day after the multi-lateral agency lowered its projection of India's growth rate to 3.75% in 2013. Notably, this is worrisome. Clearly, Finance Minister Chidambaram needs to work harder for fiscal consolidation by tightening the Government belt through austerity measures. ----- INFA

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