The Centre has taken on an unprecedented Rs 26,000-crore hit, yet making a commitment to Parliament on a money bill to balance it out. This is to ensure that the bond markets in India do not go into a huge seizure and companies planning to tap the international markets to raise funds do not suddenly face a sharp rise in costs in a tough year.
In a break from tradition, the finance ministry had put a line in the supplementary demands for grants in the just-concluded winter session, which said the demand ?will not result in any significant variation in total expenditure in Budget Estimates (2009-10), as there would be equivalent overall savings in other grants?.
The effort will crown finance minister Pranab Mukherjee?s commitment to end 2009-10 with a fiscal deficit of 6.8% of GDP, despite the impact of the additional spend.
How is it working out? In the supplementary demand for grants, Mukherjee has asked the legislature to sanction an extra Rs 25,725.22 crore ($5 billion) with the above explanatory line that is unprecedented in the history of Budget-making in India. The government has always made clear in its expenditure plans that it will either meet them through tax or other non-tax receipts. In cases where it is not possible?there is a net cash outgo, to use government parlance.
In such cases, it has asked for leeway from the Lok Sabha to keep the expenditure uncovered. As a result, the fiscal deficit rose in those years.
But this is the first time in the government of India?s Budget-making history that it has taken up a responsibility that means despite the Rs 25,725.22 crore additional cash outgo, it will not add to the expenditure budget for the year. In a normal year, the government matches a surge in the total expenditure from the Budget Estimate through additional tax revenues andor a more than expected rise in the GDP.
In the current fiscal, Mukherjee has none of these luxuries. His team has, therefore, taken up a massive gamble, which will be watched very closely by the global financial markets. By putting in the commitment to the Lok Sabha, Mukherjee has bound himself to two targets. He has already spelt out that the revised fiscal deficit will not be more than 6.8% in the current fiscal. Also, there will be no increase in the expenditure budget from the Rs 1,020,838 crore as given in the BE. To put the numbers in perspective, the government has never been able to create a matching savings for an expenditure of such magnitude.
India?s chief statistician Pronab Sen said he was not surprised with the confidence shown by the finance ministry. ?The sum is a big one, but I am quite sure the revised estimates being thrown up by the ministries in the run up to the next budget are showing savings. So there is a cushion there.?
A former expenditure secretary said the uncoverd sum means, as of now, the government does not have a matching savings. ?But obviously, it is taking on a massive effort to make the sum balance at the end of the fiscal?.
Why did the government not take the easier step? The easier step was to ask the domestic bond market for additional borrowings to finance the deficit. But then prices of bonds in the markets would have crashed. This would have created a huge gap in the balance sheets of banks and other financial institutions. The rate of interest on bonds floated by Indian companies would have also soared, impacting them.
Just a day after the supplementary was presented, Moody?s raised the outlook on the local currency bond rating to Ba2, a positive grade instead of stable. The forbearance on bond market was also rewarded by raising the ceiling on banks? foreign currency deposits to Ba1 from Ba2. This is an endorsement of FM?s team.
