Slowdown hits growth and finances

Slowdown hits growth and finances
The Economic Times, February 17, 2009, Page 16

Mythili Bhusnurmath

HIGH growth rates have helped. Changes in attitude have also helped. Above all, information systems and technology have helped the most. And, if I may add in a lighter vein, having a lucky finance minister may also have helped.” As Pranab Mukherjee unveiled the budget numbers in the UPA’s sixth and final budget, more correctly vote-on-account, on Monday, former FM P Chidambaram must be rueing budget day last year when he tempted Lady Luck.

Or maybe not! Because though Lady Luck seemed to have deserted the government after smiling on it for four successive years, Mr Chidambaram himself has been saved the embarrassment of presenting a rather sorry report of government finances. Thanks to a surprise cabinet reshuffle that saw him being shifted to the home ministry!

In all fairness, the about-turn in government finances that undoes the success of the post-reform period and takes us back to the pre-reform period is largely a consequence of the unprecedented turmoil in the global economy. As a result, after coming ‘within striking distance of fiscal correction’ it’s now back to square one all over again. And it is going to be an incredibly tough job for whichever government comes to power next.

Revised estimates presented in Parliament show revenues down, expenditure up. There can only be one outcome of such a scenario and sure enough, both revenue and fiscal deficits are up. And while the increase in fiscal deficit was expected, what is particularly worrisome is the more than four-fold increase in revenue deficit, up from 1% in budget estimates to 4.4% (Rs 2,41,273 crore) in the revised estimates. Incidentally, the fiscal deficit is not 6% as stated in the budget documents but 7.8% once off-budget items like fertiliser and oil bonds are factored in and may end up higher when the final figures come in.

This is, perhaps, inevitable when an economic slowdown is coupled with widespread unemployment. Any government, more so a democratically elected one, would have to spend more on programmes like the National Rural Employment Guarantee Programme (NREGA) to address basic livelihood concerns. Hence increased allocation on NREGA and other social development programmes like the Jawaharlal Nehru Urban Renewal Mission and Indira Awas Yojana to provide housing for the weaker sections is not only unavoidable but may even be desirable.

Having said that, two caveats must be kept in mind. One, unlike a higher fiscal deficit that can augment the country’s repayment capacity, a higher revenue deficit means the government is borrowing to spend on current consumption. A revenue deficit adds to the debt burden without creating the wherewithal to repay the debt. This is the reason why fiscal economists warn against countries running high revenue deficits.

Two, increased allocations do not translate into improved delivery on the ground. As the data on roads and other infrastructure projects released by the ministry on programme implementation has shown, progress has been tardy in most areas. Consequently, along with higher allocations government will have to spruce up implementation if we are to justify the much higher cost in terms of higher borrowing (and associated with that higher interest cost) of a higher revenue deficit.

Given that debt servicing (debt repayment plus interest payments) already accounts for almost 100% of revenue receipts, according to revised estimates for the current fiscal, the danger of a high revenue deficit going forward cannot be over-emphasised. The good thing is that the interim budget recognises the pitfalls of fiscal adventurism, with Mr Mukherjee reiterating on more than one occasion the need to ‘revert to fiscal consolidation at the earliest.’

No doubt, it is this realisation that has led the government to observe constitutional niceties and show commendable restraint, spurning the temptation to play the election card. It could not have been easy given the pressures and expectations from industry and the public. But for all of us with a stake in the future of this country, it is a welcome mark of responsible government.