“There has been an unsustainable increase in
Government expenditure. Budgetary subsidies, with
questionable social and economic impact, have been
allowed to grow to an alarming extent. The tax
system still has many loopholes... The crisis of the
fiscal system is a cause for serious concern. The
fiscal deficit of the Central Government, which
measures the difference between revenue receipts and
total expenditure, is estimated at more than 8 per
cent of GDP in 1990-91, as compared with 6 per cent
at the beginning of the 1980s and 4 per cent in the
mid-1970s. This fiscal deficit had to be met by
borrowing... The burden of servicing this debt has
now become onerous. Interest payments alone are
about 4 per cent of GDP and constitute almost 20 per
cent of the total expenditure of the Central
Government. Without decisive action now, the
situation will move beyond the possibility of
corrective action... There is no time to lose.
Neither the Government nor the economy can live
beyond its means year after year. The room for
manoeuvre, to live on borrowed money or time, does
not exist anymore.”
First budget speech of Dr. Manmohan Singh, 24 July
1991
There are sound reasons to begin with
this quote. What the doctor saw in 1991 could just
as well occur today — in different, but no less
harmful, ways. In the name of global recession and
‘kick-starting’ the economy, the government has
decided to spend its way out of trouble. Amidst much
public applause for Mr. Pranab Mukherji’s Union
Budget, let this be an article that spells worries
and makes a case for sanity, rectitude and fiscal
discipline.
The Central government’s expenditure for 2009-10 is
budgeted at Rs.10,20,838 crore (yes, that’s right:
ten lakh, twenty thousand, eight hundred and
thirty-eight crore of rupees) — an increase of 23
per cent over the bloated revised estimates of
2008-09. The total net revenue to the centre is
Rs.6,14,497 crore. Thus, we are looking at an
estimated fiscal deficit of Rs.4,06,341 crore, or
6.8 per cent of GDP. Add 4 per cent deficit on
account of the state governments and probably
another 0.5 per cent due to off-Budget items, and we
are staring at a consolidated fiscal deficit of 11.3
per cent of GDP. This coming in the wake of 10.8 per
cent for the revised estimate of 2008-09.
The pro-deficit types have been making some bizarre
arguments to justify this huge excess of expenditure
over revenue. The first is that the US federal
government will have a deficit of 13.7 per cent of
GDP. So what’s the big deal? The ‘big deal’ is that
the US dollar still remains the world’s reserve
currency — the rupee isn’t. Moreover, according to
the latest estimates of the US Congressional Office
of Budget, given President Bush’s and Obama’s
deficits, the US will have to reduce expenditure and
increase tax collections by at least 50 per cent if
it has any hope of balancing the budget in 2020.
That’s a very hard ask, given that every citizen
wants more government handouts but hates paying
extra taxes.
The other argument is that most of the expenditure
is directed to building infrastructure, which will
aid growth. That is false. Only Rs.1,23,606 crore,
or 12 per cent of total expenditure is on account of
capital outlays, and this includes Rs.54,824 crore
on account of defence capital expenditure, which
doesn’t do much in terms of building roads, ports,
electricity and railways. Thus, 88 per cent of the
ten lakh crore of rupees is nothing other than
government consumption — much of which will not
build infrastructure.
Interest payments account for Rs.2,25,511 crore;
defence Rs.1,41,703 crore; and subsidies another
1,11,276 crore. These three heads alone will siphon
off 78 per cent of the Centre’s net revenue. None
build infrastructure.
Make no mistake. This is a huge consumption oriented
budget that will raise public debt, increase future
interest payments and, if half the deficit is
monetised, cause inflationary pressures. There is no
mention of how the government proposes to curtail
consumption in the years ahead; and none on what it
will do to raise revenues. The tax structure is
still riddled with exemptions. With an effective
corporate tax rate of only 22 per cent, with a
minuscule fraction of the population bearing the tax
burden, and with poor detection and tax enforcement,
how can the government expect to bring the fiscal
deficit down to no more than 2.5 per cent of GDP —
let aside balance the budget?
There is no free lunch. If we want to spend more to
become an inclusive government, we need to gather
more revenues. It is that simple. But I see nothing
on these lines in this budget. Which is why I am
making this plea for fiscal rectitude. Let’s get
real. Or else, let’s prepare for another quote like
the one I started with.
Published: Business World, August 2009
