The budget has got a near unanimous thumbs down from economists and analysts but very few have indicated what the finance minister could have done differently. No, I am not seeking to hold a brief for the ace politician. All I am saying is that while we overtly worry over the fiscal deficit, we are all conscious he is working in a milieu of political deficit.
Pranab Mukherjee doesn't have the financial elbow room to implement the socialist diktats of the Congress leadership. And he doesn't have the political elbowroom to go for bold reforms. The budget doesn't show the political will to tax enough and distribute goodies nor does it restrain the fiscal deficit enough to allow the private sector to grow.
The profligacy of the second UPA is serious and my fear is we may have to go through another 1990-like crisis to shock us into reforms. The fiscal deficit, when seen as a percentage of GDP, may seem controllable. But the right way to look at it should be how much extra are we spending compared to our revenues. Up until 2008, our deficit was 20 percent of our revenues, i.e. if revenues were Rs 100, expenditure was Rs 120.
In FY09 (2008-09), apparently because of the global crisis, but equally because the UPA wanted to come back to power, our expenditure was 61 percent more than our revenues. In FY10 it dropped to 47 percent more than our revenues. In FY11 our expenditure was 46 percent more than our revenues, despite revenues getting a boost from the sale of spectrum. In FY12, we have spent a huge 65 percent more than our revenues. And in FY13, supposedly after serious efforts to curb the deficit, our expenditure is budgeted to be 52 percent more than our revenues.
Individuals who spend more than 50 percent of their revenues, won't ever be given a credit card by a bank. What is becoming clear is that like some compulsive, spendthrift borrowers, the Indian government is unable to control its expenses or raise revenues. Until recently growth or perceived growth was tenuously bridging the gap between revenues and expenses. But now that growth is under serious threat.
One big threat to growth is coming from the receding capex (capital expenditure). The governmental dis-saving has led to India's savings and investment rate dipping by 4 percentage points in the past four years. The government's own capital account expenses have fallen from 23 percent of total expenses in 2005-06 to around 13 percent. For the current year the government budgeted 13 percent of total expenditure as capital expenses. The revised budget shows that only 11.8 percent was spent in the capital account.
The railways are the best example of a serious dearth of government investments that is hugely pressuring the country. The ability of Coal India to supply coal to power plants is stymied as much by a lack of rakes as by a lack of new mines. Cement was an industry with overcapacity until recently, but prices could be raised in many pockets since rakes weren't available to move cement to many quarters. The government has not found the money to expand the rail infrastructure. It nowhere has the will to privatise it.
The other major threat to growth is inflation. While global factors are fanning commodity inflation, the spendthrift UPA, with its yawning fiscal deficit is doing a much better job. The bond market greeted the budget with yields shooting to nearly 8.5 percent. There is some hope that the RBI will cut rates in April. But with such a deficit, high global liquidity and so much left to be done to correct administered prices, it is tough to expect the RBI to oblige. Deputy Governor Subir Gokarn may have sounded appreciative of the government's tax increases to bridge the deficit, but if month-on-month core inflation rises, as it well may, the RBI may find itself postponing the much awaited rate cut.
In which case growth gets postponed that much more. For the moment it doesn't appear growth will do much better in the coming year.
Politically, another year of the lameduck UPA could mean more populist policies. An earlier election can well mean a 1997-type third front government at best or a period of fractured mandates and frequent elections. Clearly the political deficit looks set to persist as much as the fiscal deficit.
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Updated Date: Mar 17, 2012 17:01:52 IST