With 2G spectrum auction (on account of which the government expected a revenue of Rs.40,000 crores) turning out to be a damp squib and disinvestment receipts (on account of which the government expected a revenue of Rs.30,000 crores) so far proving to be a virtual non-starter, the signs are ominous indeed. Given that the general election of 2014 is not far off and quite a few grand plans for social sector spending already announced (given that the chairperson of the ruling UPA government believes, and forces others to believe as well, that social sector spending is the sure fire way to win elections) the fiscal situation looks pretty bleak.
The only way the government can check unsustainable rise in fiscal deficit in the wake of spiralling revenue expenditure is a cut down on capital expenditure, which is something we have always experienced, as these are easy to chop off. In fact, we are already seeing the same phenomenon here. In the month of October, while the total revenue expenditure increased by as much as Rs.75,377 crores, capital expenditure rose by a measly Rs.10,072 crores. The danger here is two-fold. Firstly, less than a quarter of India’s fiscal deficit being used for capital generating projects imply that India’s debt burden will keep on increasing, as debt servicing becomes a problem as the fund invested in capital projects need to offer a rate of return which is 4 times the interest paid by the government on its debt. Secondly, inability of the government to invest in projects that help augment the capital base of the economy will mean that the slowing economy will take that much more time to recover while shrinking capacity will mean sustained inflation pressure.