Two separate bits of news on 23 November-but interlinked-indicate the state of finances in the country. One news is that the Central government's fiscal deficit is likely to overshoot even the revised targets while the second news is the Uttar Pradesh government is waiving off farm loans as a birthday gift for Mulayam Singh Yadav, the father of the Chief Minister.
The fact that a bankrupt state government-which is seeking various packages from the Centre-can waive off farm loans of Rs 1,650 crore at a time when the Central government is also struggling to keep down its own deficits shows the disdain with which politicians treat public funds.
The Central government is expected to close fiscal 2012-13 with a fiscal deficit of 5.5-5.6 percent of GDP. The original budget estimate was a fiscal deficit of 5.1 percent of GDP while the revised budget estimate (October 2012) was a fiscal deficit of 5.3 percent of GDP. The higher deficit is due to some budget figures such as telecom spectrum auction and government disinvestment going awry and due to slow tax collection growth in a weakening economy.
Corporate taxes grew by just 2 percent in the April-October 2012 period on the back of economic growth slowing to expected levels of 5.8 percent in 2012-13 from levels of 6.5 percent seen in 2011-12. The result of the government overshooting fiscal deficits targets is higher than budgeted market borrowing of Rs 20,000 crore (could be up to Rs 50,000 crores if deficit figures are not met), leading to rising government bond yields that in turn leads to higher interest rates for borrowers.
Akhilesh Yadav's Uttar Pradesh government is running a debt of around Rs 2,50,000 crore and an annual fiscal deficit of around Rs 19,000 crore as of 2012-13. The government receives a grant of Rs 70,000 crore from the Centre for implementing various projects. The state is in no position to hand out free gifts to its people and Akhilesh Yadav has done just that by waiving off farm loans given from a government-run scheme. The funding for the state will have to come from the centre given that the state has no money to spend, given its debt.
To be fair to the Uttar Pradesh government, every other state government in India-barring a very few-doles out gifts ranging from free television sets and laptops to farm loan and other loan waivers. Needless to say all these generous state governments have no money and depend on the Centre for grants. Uttar Pradesh is just doing what other states are doing, leading to more pressure on the centre's fiscal deficit.
The Centre is engaged in trying push some key bills and as usual parliament has not worked for a full day in the current session. The fiscal deficit will take a back seat in Parliament, which will approve all expenses of the government without raising a single question.
India is living in a world of disconnect. The country has no solution to its debt issues except raising limits for FIIs to invest in the country's debt. FII limits for government bond investments stand at USD 20 billion (the limit has gone up four-fold over the last 10 years) and the government is considering increasing the limits further. The fact that eurozone countries such as Greece, Italy, Spain, Portugal and Ireland are in a big mess due to their sovereign debt being issued in euros has yet to hit India. The more the country's debt is owned by FIIs, the more vulnerable the country is to the way it manages its finances.
India, at this point of time, is showing no maturity in managing its finances and will become more vulnerable to FIIs taking a dislike to the country's debt.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.