The Bill has set its sights high indeed! The Bill wants the revenue deficit (the amount by which the day-to-day expenses exceed its revenues and roughly comparable to the loss in a companys P&L a/c) to be brought down to zero in five years. It also wants the fiscal deficit (the over all amount by which the government is in the red, taking all its receipts and outflows into account and roughly comparable to the cash flow statement of the company) to be brought down to 2 per cent in the same period; a number which is in excess of 5 per cent right now and 10 per cent if one includes the states also.
The question on everyones lips is: Can this be done If one took a poll of all the economists and investment bankers in the country on this subject, my sense is that in a rare show of unanimity all would say that the targets set by the Bill are not achievable unless some very drastic decisions are taken. Their cynicism would be justified given the fact that in spite of an economy growing at an impressive rate over the last ten years and tax collections also rising, the fiscal deficit has not budged an inch. So much so Standard & Poors one of the two leading international credit agencies recently put Indias domestic debt on speculative grade and the outlook negative inspite of our huge reserves, good GDP growth and low inflation. Expectedly, the finance minister while tabling the motion called the Bill a hesitant step!
Not that the government is sitting quiet waiting for the volcano to erupt. On the contrary, it has launched an ambitious programme to buy back its high coupon debt. It is trying to take advantage of the low interest scenario in the country to put through this action plan. Most of the debt is held by the insurance companies, banks and provident funds, which are either owned or influenced by the government apparatus and theoretically amenable to nudges from North Block. But they have all had a great time in the last few years riding the investment profits they made as their portfolio of government securities went through the roof; so much so, Indian banks have forgotten how to lend money. Now to get them to give up their stock of high coupon investments needs a lot of inducements. The government gave some carrots in the last budget in the form of tax reliefs and the programme took off. But it is too early to say by how much the interest outflow of the government will go down but it may make a dent.
On the other hand, pulling in the opposite direction are some other factors. The Provident Fund trustees have dug their heels and are continuing to pay 9.5 per cent which is a good 4 per cent more than the 10 year bond yield of 5.6 per cent prevailing today. So someone has to carry the can on this and there are no prizes for those who guess it right! Its very likely that in the years to come, the Union budget will be providing huge amounts for bailing out Provident Funds like it did to the nationalised banks and UTI in the past. Also adding to the fiscal deficit will be the outflows on account of the pension scheme for senior citizens announced by the government. The scheme is of course very laudable and tries to fill the long term needs of Indias developmental plans. The liability on the central finances however will be substantial and is bound to increase the fiscal deficit.
In a way, the Bill tries to address issues which are of a historical nature. While economists have been cautioning financial prudence and discipline for the last twenty years, the political system has been spending based on its idea of development and poverty reduction. So we have had huge doles to farmers, subsidising of almost every item of mass consumption whether it be rice, wheat, sugar, kerosene, electricity, bus fares or cooking gas.
Government offices are still staffed by millions of people who do little work but are well paid even as the forthright recommendations of the Geethakrishnan Committee Report on reduction of government overheads gathers dust. The sum total of all these actions is the fiscal problem and this is why economists are very cynical and the politicians very cautious in their guesses about the future. But in a broader sense, this high deficit means that there is less money to spend on hospitals, roads and schools for the next generation. In other words, our desire to lead a good life is at the cost of our children and our grandchildren a rather chilling thought.
The author is a Delhi-based investment banker and Convenor of the BJP Central Economic Cell. The views expressed herein are personal. He can be contacted at firstname.lastname@example.org