FM's budget gap isn't fixable in 2011-12 - so let's not fix it
The govt's fiscal deficit target will be missed by a mile. But in a year of slowdown, one should let it rip and focus on infrastructure spending to get growth back on track
One wonders why our Finance Ministry boffins beaver away to produce those budget numbers when they are always wrong. The only thing we get to know is whether they were off by a wide margin or only by a whisker.
We are barely half-way into the financial year, and the numbers for the first quarter show that Pranab Mukherjee's budget arithmetic has gone for a complete toss.
Of course, none of the assumptions he made while presenting the budget on 28 February have held. Gone is the dream of 9 percent GDP growth. Gone is the assumption the inflation will come under control. Gone is the optimism about global growth.
Not surprisingly, the fiscal deficit bottomline of 4.6 percent is not going to be met.
Figures for the first quarter (April-June) show that the fiscal deficit is already at 7.88 percent - off by more than 3 percent - at a time when the economy is slowing and tax revenues may not remain buoyant in the second half of the year. The first quarter GDP rate was 7.7 percent - well below the Reserve Bank's 8 percent projection and the Prime Minister's Economic Advisory Council's (PMEAC's) 8.2 percent.
For contrast, 2010-11 saw a fiscal deficit of just 2.28 percent in the first quarter. And this was before the 3G spectrum revenue bonanza kicked in in the second quarter.
The fiscal deficit, which measures the gap between government spending and revenues that need to be bridged by borrowing, is the most important economic number in the budget for two reasons. If it is large - as this one promises to be - it means the government will borrow more, raising the cost of money for others and its own costs in the process. Large fiscal deficits tend to have an inflationary effect - after a lag.
The second impact of a large fiscal deficit is that other borrowers tend to get crowded out, both because there's an elephant feeding at the credit trough, and also because banks will be more comfortable offering no-risk loans to the sovereign than to ordinary mortals who may default when the economic climate is difficult.
The PMEAC, however, is an incurable optimist. It believes that the 4.6 percent fiscal deficit target can be met if revenues are buoyant towards the end of the year, and if "subsidies" are kept in check.
However, even the 7.88 percent deficit for the first quarter is a fudged figure. It does not include a large part of the oil subsidies that are either paid for by oil and gas producing companies like ONGC and Oil India, or the subsidy that comes from the budget. As usual, this year's subsidies are grossly underprovided for.
Let's take the budget provision. Mukherjee's budget provides for Rs 20,000 crore as oil subsidies - but the entire amount has already gone to pay for last year's underpaid subsidies!
In other words, this year there is nothing in the kitty to pay loss-making oil marketing companies, which expect the annual losses (also called under-recoveries) from subsidising diesel, cooking gas and kerosene at a further Rs 1,20,000 crore.
The right way to calculate the fiscal deficit is to add the under-provided subsidy bill to the official fiscal deficit figure provided in the budget, and this comes to
Rs 5,32,817 crore (fiscal deficit of Rs 4,12,817 crore plus Rs 1,20,000 crore that will have to be paid to oil companies sooner or later to keep them afloat).
If we take the underprovided oil subsidies into account - paid for by the issue of bonds or cash to the oil marketing companies - the real budgeted fiscal deficit should be closer to 6 percent.
But we are already at 7.88 percent in the first quarter. So where does the PMEAC's optimism stem from when growth is actually slowing down?
There is only one way in which current figures can be massaged to give us a 4.6 percent fiscal deficit. If one rules out over-the-top revenue growth in a year of domestic and global slowdown, the fiscal deficit can be brought down only by reducing government expenses.
Nobody is offering any bets that expenditure cuts will come from salary cuts of government employees or any current expenditure. It will come by stamping on capital expenditure - which is the only thing that will spur investment and growth.
Government spending on infrastructure and machinery is another key to growth, and if that doesn't happen or is curtailed, the economy will spiral further downwards.
In fact, the only realistic options left are to forget about the fiscal deficit and focus on efficient capital spending - including infrastructure projects. The worry would be about inflation. But with agriculture looking up and global commodities coming off from their recent price highs, that may be a risk worth taking.
It's a choice between two evils: a higher fiscal deficit and the possibility of higher inflation, or a higher fiscal spend on infrastructure with the possibility of spurring growth and hence revenues (which will bring down the fiscal deficit).
I would take the latter option - even while keeping a wary eye on inflation.
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