Fiscal math has gone awry

Dr. Santosh Kumar Mohapatra*

According to former Union Finance Minister P Chidambaram, the Budget is all about numbers: every number must be justified. If just three numbers are wrong, the Budget — that is the Annual Statement of Revenue and Expenditure — is a worthless pile of papers. The three numbers are the estimates of total receipts, total expenditure, and the borrowing (= fiscal deficit).

Though the government is in denial mood, an unfettered fiscal deficit of 9.5% of GDP in a revised estimate of 2020-21 and projected 6.8% of GDP in next fiscal with concomitant other economic malaises indicates not only fiscal profligacy but the looming fiscal apocalypse. Sitharaman’s fiscal math has gone awry. The Indian economy seems to have been dragged into the fiscal abyss.

However, it is good to see that the Central government which was opposed to a higher fiscal deficit – an excess of expenditure over non-borrowed receipts – in past has shed, albeit belatedly, its so-called fiscal conservatism and fundamentalism and has embraced the countercyclical fiscal policy.

It has discarded its long-term commitment to bring the deficit down to close to 3% of GDP and plans to lower the fiscal deficit to 4.5% of GDP only by 2025-26. The revenue deficit is targeted at 5.1% of GDP in 2021-22, which is lower than the revised estimate of 7.5% in 2020-21 but much higher than those of previous years

But what is bizarre is that fiscal deficit has been relegated to a secondary role in fiscal policy by the government not willingly but to cover-up its dreadful failure to mobilize resources to bridge the gap between receipts and expenditure. This exposes the two-facedness of a government that twists rules to suit its purpose.

In the years following the global financial crisis, the government’s fiscal deficit had widened from 2.54% in 2007-08 to 6.1% in 2008-09 and 6.6% of GDP in 2009-10. The reduction in 2010-11 was only 4.9 %, a decline of 1.7%. At that time, so-called intellectuals, markets, economists, and an erstwhile opposition party – BJP -had opposed the rise of the fiscal deficit.

Nobody had appreciated the then UPA government, which decoupled India from the global crisis, and India was less affected in comparison to other countries. But now many intellectuals, economists are camouflaging failures of the government citing the aftermath of the corona pandemic that affected India more due to poorly planned lockdown. When China witnessed positive growth, we saw negative growth. But now dubious characters of so-called intellectuals are exposed who are now arguing in favour of fiscal deficit to appease ruling dispensation.

What is worrisome is that the mounting fiscal deficit is not due to enlarged expenditure as propounded but primarily on account of revenues collapsing due to pandemic or the inability of the government to tax the rich, corporates, and affluent people according to their capacities.

However, the fiscal deficit is not bad if the resources generated through borrowing are spent on creating assets or on the welfare of people and within the repayment capacity of the government. However, the utmost care should be taken that higher borrowing is converted into inclusive growth and spent productively so that debt sustainability (i.e., debt -GDP ratio does not increase), inter-generational equity is maintained and the responsibility of paying the debt is not shifted to the future generation. But the distressing news is that while the burden of escalating debt falls on the masses; benefits of debt-induced growth are garnered by a few only.

However, the debt burden seems to be unsustainable and the fiscal cataclysm is evident from the fact that the debt -GDP ratio is expected to touch 90% in the current fiscal up from 72 .2% in 2019-20, much above the 60% envisaged by the government. The debt -GDP ratio will remain at an elevated level in foreseeable future as per the projection of the 15th Finance commission. If the economy does not grow by14.4 % in nominal term and 10% in the real term (taking inflation into account) in 2021-22 as estimated, then the debt problem may assume an alarming proportion pushing the economy into a quagmire.

A higher debt stock and escalated interest liabilities will lower social sector expenditure as already seen in this budget. Many developed countries have higher debt-GDP ratio debt -to-GDP ratio. But they are able to sustain because their currencies are reserve currencies. If the debt can be converted into higher investment and growth, ultimately debt-GDP ratio can stabilize.

Hence, a better indicator is a debt-tax ratio. This is much higher and not lower in India compared to other countries. What is disconcerting is that India has the highest interest in government bonds is artificially suppressed which is financial repression. Around 52.4 % of the central taxes are likely to be spent on interest payments.

The Expenditure on interest payments will account for 52.4% of central tax revenues in 2021-22 -the highest in 18 years and up from 37% in 2019-20. fiscal upheaval is clearly palpable from the fact that the government is expected to spend around Rs 8 .1 lakh crore on interest payments in 2021-22 against the net tax revenue of around Rs 15.5 lakh crore.

The central government has consistently had a primary deficit since 2008-09 and it has trebled between 2016-17 and 2019-20. Primary deficit (fiscal deficit-interest payments) is likely to double between 2019-20 and 2021-22. A rapid rise in primary deficit means that the government is now borrowing to service past debt rather than raising public spending on social infrastructure projects.

The budget expects a primary deficit of Rs 6.97 lakh crore in 2021-22 from Rs3.21 lakh crore in 2019-20 and Rs 11.56 lakh crore in 2020-21. It is assumed, if expansionary fiscal policy adopted, faster GDP growth and tax buoyancy will take care of the growing debt problems.

But in the last 5 years (2015-16 to 2020-21), India’s nominal GDP grew at a compound annual growth rate (CAGR) of 7.2 %, while government tax revenues grew at a CAGR of 7.2% in tandem. But interest payment grew at a CAGR of 9.4%. This shows how the economy is heading for a fiscal apocalypse and fiscal math has gone awry.

 

The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]

 

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way
represent the views of Sambad English.