The Central Statistics Office (CSO) has published the economic growth numbers for the period October to December 2015. It has also put out the economic growth projection for the current financial year i.e. 2015-2016 (April 1, 2015 to March 31, 2016).
The Indian economy grew by 7.3% during the period October to December 2015. It is projected to grow at 7.6% during 2015-2016. Economic growth is measured by the growth in the gross domestic product (GDP). But GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the government wants us to believe it is.
Much has been written about the fact that India’s economic growth numbers can’t be possibly right and given that I wanted to discuss something else, but equally important in this column.
The GDP growth is declared in several forms. When CSO talks about the Indian economy growing by 7.6%, during the course of the year, it is talking about real GDP growth. Real GDP growth is essentially adjusted for inflation. The economic growth which is not adjusted for inflation is known as the nominal GDP growth. The nominal GDP growth for the current financial year is expected to be at 8.6%. Typically, the difference between nominal and real GDP growth is greater than this.
When calculating the fiscal deficit, the government uses the nominal GDP. This is because the revenue as well as the expenditure of the government are not adjusted for the prevailing inflation. Fiscal deficit is the difference between what a government earns and what it spends during the course of the year.
When the finance minister Arun Jaitley presented the budget in last February, he had set a fiscal deficit target of 3.9% of the GDP. The GDP here is the nominal GDP. There are essentially two numbers in the fiscal deficit calculation—the absolute fiscal deficit number and the nominal GDP number.
The absolute fiscal deficit number for this year was set at Rs 5,55,649 crore. The nominal GDP number in the budget was assumed to be at Rs 14,108,945 crore. It was assumed that the nominal GDP would grow by 11.5% in comparison to the nominal GDP in 2014-2015, which was at Rs 12,653,762 crore.
The growth of 11.5% in nominal GDP has not materialised and now close to the end of this financial year, the government thinks that the nominal GDP growth will be at a much lower 8.6%. And this is precisely what has upset the fiscal deficit calculations of the government. A growth of 8.6% means that the nominal GDP for 2015-2016 will come in at Rs 13,741,986 crore.
If the government maintains an absolute fiscal deficit of Rs 5,55,649 crore, then the fiscal deficit as a proportion of the nominal GDP will come in at 4.04% of the GDP. In order to maintain the fiscal deficit at 3.9% of the GDP, the government will have to cut down the fiscal deficit by around Rs 20,000 crore, assuming all other projections remain the same.
A fiscal deficit of 4.04% of the GDP is higher than 3.90% of the GDP, but not significantly higher. But that is not what has got the government worrying. In fact, the finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. Fiscal consolidation is the reduction of the fiscal deficit.
In July 2014 Jaitley had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”
He had further said: “One fails only when one stops trying. My road map for fiscal consolidation is a fiscal deficit of 3.6 percent [of the GDP] for 2015-16 and 3 percent for 2016-17.”
In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.
The point being that the government had originally envisaged achieving a fiscal deficit of 3.6% of GDP during this financial year. This target was postponed by a year and the government set itself a much easier target of 3.9% of GDP. And given this, it is very important that the government achieve this much easier target, if it wants people to take it seriously in the future on the fiscal deficit front.
Further, it is worth pointing out here that typically if the government were to follow the international norms of declaring the fiscal deficit and not include disinvestment proceeds as a revenue item but a financing item, the fiscal deficit for 2015-2016 would be at 4.4% of the GDP. Also, the 3.9% of GDP fiscal deficit target does not include subsidy payments of more than Rs 1,00,000 crore that need to be made for fertilizer and food subsidies.
The government can achieve a 3.9% of GDP fiscal deficit target, by increasing its revenue and cutting down on its expenditure. The government has been trying to increase its revenue by increasing the excise duty on petrol and diesel. Three such hikes have been made since January 2016. This has led to a situation where oil prices have fallen dramatically but petrol and diesel prices in India have actually risen over the last one year.
The petrol price in Mumbai as of now is Rs 66.05 per litre. The price as of last February was at Rs 63.9 per litre. The price of the Indian basket of crude oil during the same period has fallen by more than 44%.
While the government continues to raise the excise duty on petrol and diesel, it continues to own a 11.2% stake in cigarette maker ITC. This stake as of yesterday’s closing price was worth Rs 28,256 crore. What is so strategic about owning a stake in a cigarette company and at the same time run advertisements trying to tell the country at large that it consumption of tobacco is injurious to health? Why can’t this stake be sold and the money used for better purposes?
This is something that the government needs to explain.
(The writer is the author of the Easy Money trilogy. He tweets @kaul_vivek)