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Oh, For Some Rectitude

Omkar Goswami

“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


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