To start with, the ratios which economists pontificate on have all been thrown into disarray, what with the GDP numbers being moved up and down. This is not to question the veracity of the GDP numbers but to highlight how changes in GDP can alter perceptions on the appropriateness or otherwise of the Gross Fiscal Deficit to GDP ratio. It is not of any significance whether the GFD for 2002-03 is 4.5 per cent or 5.5 per cent of GDP. The movement one way or the other is not reflective of improvement or deterioration. Better appreciation may be obtained from absolute numbers. The GFD for 2001-02 as per the budget estimate was Rs 1,16,000 crore. The stance on the GFD for 2002-03 has to be viewed in terms of whether the absolute GFD projected for 2002-03 is significantly different from the budget estimate of 2001-02.
While the external debt has been kept under control in an exemplary manner, our obsessive fear of an external crisis has resulted in a relaxed view being taken on internal debt. While recognising the adverse repercussions of an external debt crisis, we do not believe that there can be an internal debt crisis. The outstanding internal debt of the centre, which was around Rs 3,08,000 crore in 1995-96, is a staggering Rs 8,93,000 crore in 2001-02. The position regarding total domestic liabilities of the centre is equally bad with an increase during the same period from Rs 5,54,000 crore to Rs 12,56,000 crore. For us to pretend that internal debt and other liabilities do not matter is foolhardy.
One would have hoped that we would have by now learnt the dangers of a Ponzi scheme but that does not appear to be so. The greatest Ponzi is the centres market borrowing. Of the budget estimate for 2001-02 of gross borrowing of Rs 1,19,000 crore (which has been exceeded), about Rs 44,000 crore was to finance repayments. Time and again, it has been cautioned that such an approach cannot but lead to a fiscal collapse but we believe this to be only a remote theoretical possibility. Since the revenue deficit is two-thirds of the GFD, the solution it is felt is to reduce the revenue deficit. There are many constraints in bringing down the revenue deficit. But as interest payments are about one half of the revenue deficit, the solution to the fisc would then be to simply drop interest rates! This underlying theology would, in all probability, be, once again, anointed on February 28, 2002. This appears to be a neat solution to resolve the straightjacket in which the fisc finds itself. The facetious answer appears to be to keep slashing interest rates to the point the necessary fiscal correction is attained. It hardly needs to be stressed that this is a dangerous approach which would boomerang on the government.
But all this is of little serious help to a responsible finance minister. The question really is what would be a viable macro strategy for 2002-03 The fisc clearly does not have the strength to provide a stimulus to the economy. If there is to be really big-ticket public sector disinvestment in 2002-03, the entire amount should be used to repay internal debt. The slowing down of the gross borrowing programme would then enable a genuine softening of interest rates. But, with lower expenditure, the cherished dream of industry of a strong fiscal stimulus would be aborted. We seem to be under the erroneous impression that financial engineering can enable us to provide a strong fiscal stimulus to the economy. The only realistic strategy is for the fisc to play a neutral role in the sense that it should not try to be any more expansionary than it already is and ensure that the negative public sector savings are reduced.
In a stagnant or even shrinking fisc what should be the sectoral thrust areas There are vast tracts of the economy where commercial activity is unwilling or unable to go into, such as social services, and much of the activity of the fisc should be in these sectors. We may believe that we are capable of a much higher rate of growth but in an interdependent world economy we must recognise that we are doing well if we chug along at the 4.5 to 5 per cent growth rate for the next few years. All this might sound negative but not damaging the system further would itself be a major achievement. Advocates of expansion who decry the dogma of conservative management are doing a disservice to the country.
What then is the role of macro-economists at the present juncture in designing fiscal policy While eager beavers would assert that they do have a way out, the sad truth is that there is little that macro-economists have to offer. We economists have failed to latch on to the central areas of fiscal adjustment and somehow believe that structural adjustment can be put through together with an expansionist fiscal policy. It is time that economists in India left the branch of fiscal economies for a while.
Perhaps, the time is apposite for bureaucratic equivocation which would translate into a little tightening here, a little relaxation there, rather than any drastic policies. We do not seem to have the stomach for stern fiscal adjustment so at least let us stagnate and not face the disastrous impact of fiscal expansion. All this appears trivial and reflects a maverick viewpoint but it is better to be burnt at the stake than participate in positive action which would destabilise the economy. The fisc is on a dangerous precipice and we are oblivious of the thin line.