What explains this healthy situation? Two important developments. One positive – greater tax buoyancy and, the other fortuitous - windfall revenue generated through the auction of the 3G (Third Generation) spectrum and broadband. It is important to note here that the revenue generated through the auction was more than Rs. 1,000 bn.
The bigger problem, however, is the deficit itself. Rather, the constituents. In the report, “The Future of Public Debt: Prospects and Implications,” by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli, published by the Bank of International Settlements (or BIS Working Paper No. 300), there is discussion two types of deficit viz. cyclical deficit and structural deficit. A cyclical deficit refers to the deficit that increases at the lower end of the business cycle and decreases when the cycle turns around. Structural deficit, on the other hand, refers to the deficit that shows stickiness across the business cycle.
In case of India, most of the deficit components are structural in nature. And during high growth period, India has demonstrated the uncanny ability to find expenditures to meet rising income rather than conserve the same for the rainy season. The best example that comes to my mind is the debt waiver scheme that was announced during Feb’08 that was estimated to cost Rs.600 bn. Did this scheme led to lower indebtedness? Highly doubtful. Has this scheme reduced incidences of farmer suicides? NO. Could this amount been better utilised? Anyday.
First, there’s the holy grail of Indian politics – subsidy. Oil subsidy remains high. So does fertilizer and food subsidy. And, once Food Security Bill comes into force, the impact could be debilitating. As per the estimates of the expert committee headed by Dr Rangarajan, Chairman of the PM’s Economic Advisory Council, food subsidy will rise to Rs. 920.60 bn, which is about 65% higher than the estimated subsidy bill for the current financial year. As this will call for increased procurement of foodgrains, one can only expect a rise in MSP (Minimum Support Price) to achieve this objective and also additional cost of storage of foodgrains.
Currently, oil subsidy itself is estimated to be close to Rs. 750 bn. Additionally, as the turmoil in the African nation spreads to Middle East, the situation can worse. And, with inflation remaining high the government will, per force, prefer not to align domestic oil prices with international prices, for fear of further backlash. Thus prices of petroleum products and fertilizers are likely to remain the same, thereby inflicting further damage to the fiscal position.
With regard to the comfortable fiscal situation this year, let us not be under any illusion of successful fiscal management by the government. There’s no indication whatsoever about the governments intent to bring a check to its profligate ways – be it through reduction of wasteful expenditure or through administrative reforms to check the huge leakage in the system or more prudent subsidy schemes. With unchecked rise in expenditure, the only way the deficit can be under control would be through increase in receipts. And, that’s a big if.
With the 3G auction behind us, only other source of some one-off revenue would be disinvestment in government entities. Success would depend on improvement in overall investment climate. If the climate does not improve the government will be hamstrung. Thus the hope of the government would pin on rising tax revenue. Whether the tax revenue will continue to be as buoyant, remains the moot question. With GDP growth expected to be lower next financial year, things do not definitely look as good. More so with the government facing a crisis of confidence, in terms of high inflation and corruption at higher levels. I believe that the forthcoming budget would see the government adopting more populist schemes to deflect the recent spate of criticism. This will mean, good bye to fiscal prudence.