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Spending Beyond Compare

Omkar Goswami

Well, well, well. In its last year of its being in power, the Congress-led UPA government has finally blown it. The fiscal deficit has gone through the roof. By its own admission, the central government’s fiscal deficit for 2008-09 will be 6 per cent of GDP — up from 2.7 per cent in 2007-08. Add an extra 1.8 per cent on account of ‘special securities’ issued by the centre to additionally subsidise fertilisers and oil, and another 3.5 per cent of GDP as the combined deficit of the states, and we are staring at a consolidated fiscal deficit of 11.3 per cent of GDP. I will bet that when the actual data arrives, the consolidated fiscal deficit for 2008-09 will cross 12 per cent of GDP.

These numbers probably make no difference to most in the Congress and the UPA who believe that that they can spend their way to winning the next elections. But these should have made Dr. Manmohan Singh and Mr. P. Chidambaram cringe. Both know the ill effects of running high deficits. Both have had to work hard to bring them down in their times at the Ministry of Finance. And both know how difficult it is rein in profligacy, especially in weak coalition governments.

In fact, the numbers must be particularly galling to Mr. Chidambaram. Having worked tirelessly at bringing down the central government’s above-the-line fiscal deficit from almost 5 per cent of GDP in 2003-04 to 2.7 per cent for 2007-08, he must be wincing at it shooting up to 6 per cent — plus an extra 1.8 per cent on account of below-the-line items. He had suffered opprobrium and brickbats within his party and among his allies as he brought the deficit down, year by year. And then, when he had almost breasted the finishing tape, the ground gave way under his feet.

I can’t help feeling sorry for him. On 29 February 2008, when he sat down after his 2008-09 budget speech, Mr. Chidambaram thought he had a winner. The budget took the wind out of the opposition’s sails, won kudos from industry, and bequeathed bounties to all segments of society that mattered for the forthcoming election. Here was a reformer committed to inclusive growth and, through huge hikes in social expenditure programmes, was returning to the masses what was a bit of their just dues. The beauty of it was his claim that, despite all the additional expenditure, the cash fiscal deficit of the centre would be at 2.5 per cent of GDP.

At the core of the 2008-09 budget were some big bets: that GDP growth would not slow down; that huge expenditure outlays and loan relief would further stimulate domestic demand; and that excise relief would ignite further growth of manufacturing.

I had written then in this column, “While mega-Keynesian budgets like this get scores of 9 out of 10 in the heady moments, they have a habit of getting unstuck”. That’s what happened with falling growth; lower than expected revenue receipts; and way higher than budgeted expenditure, especially on account non-plan items such as burgeoning food and fuel subsidies. The cash deficit ballooned to 6 per cent of GDP — instead of the budgeted 2.5 per cent.

Don’t think of this as the cost of kick-starting the economy through the two stimulus packages of December 2008 and January 2009. Those won’t account for an extra 1.5 percentage points of GDP. It is all about the growth bet going horribly wrong, and along with it the assumptions regarding the buoyancy of tax revenues. The 2008-09 budget had precious little room for manoeuvre. India had to achieve at least 8.5 per cent GDP growth and deliver around 20% increase in revenues for the deficit to be around 2.5 per cent. It hasn’t happened. And nobody dared pull the plug on spending. Indeed, John Maynard Keynes was invoked by all and sundry based on a facile assumption that we could spend our way out of trouble, irrespective of what we spent it on.

Where now? I’m afraid that we are in very dangerous territory. With the combined deficit set to breach 12 per cent of GDP, we are looking at a heavy borrowing programme that will put upward pressure on interest rates — forcing the RBI’s hands to further cut the repo rate and the CRR. We are also looking at under 7 per cent GDP growth in 2008-09, and probably 6 per cent growth the next year. And a very unruly, fractured coalition government. So, all the good work done by Mr. Chidambaram has been wrecked by electoral profligacy. And will remain wrecked for the next couple of years. Because spending your way out of trouble carries more dangers than realised. And because diabetics should never be allowed to keep their hands in the cookie jar.

Published: Business World, March 2009


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