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
