Jan 11, 1999
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RBI REPORT Time to Worry The central bank doubts the Government's ability to meet budget targets. Is India heading for fiscal hell? By Priya Ramani
Naturally enough, the RBI would like to play down the prospect of financial ruin but it comes through loud and clear. "The slow growth in industry has clouded the prospect of achieving a rate of growth of 6 per cent," states the central bank's report tersely. Considering even the 6 per cent figure is a rollback -- in its annual report released in August 1998, the apex bank had projected a GDP growth of 6.5 per cent which was scaled down in October to 6 per cent -- the future is looking distinctly grim. So who's the culprit this time? The RBI report rounds up the usual suspects -- excessive spending and insufficient revenues. Total expenditure jumped up by a hefty 29 per cent against a target 13.9 per cent; the figure for the same period last year: 16.6 per cent. More alarmingly, much of it is revenue expenditure which is higher at 28.5 per cent; the 1998-99 budget had targeted a growth of just 15 per cent. Receipts, on the other hand, plodded along, growing a meagre 11.7 per cent between April and December compared with a projected 17 per cent hike. It didn't help that Finance Minister Yashwant Sinha's much talked-about disinvestment programme for public- sector enterprises turned out a damp squib -- it was supposed to have raked in Rs 5,000 crore but barely managed Rs 225 crore. Which is why borrowings went up. According to the RBI, net borrowings by the government between April and December 1998 were Rs 54,617 crore against an anticipated Rs 48,326 crore. In gross terms, the Government's borrowings crossed Rs 80,453 crore in just eight months; it was expected to touch the market for up to Rs 79,376 crore. That means the Government has been borrowing Rs 319 crore every day from April 1 to December 8, scrambling to cover its current expenditure commitments. "The Government is borrowing to finance its consumption needs," says Raghavendra Jha, an economist at the Indira Gandhi Institute of Developmental Research. And that's a recipe for financial disaster. What went wrong this time? Primarily, it is industry's dismal growth that is to blame; it rose by a mere 3.6 per cent. This despite a rather robust performance in electricity generation. Others factors were at work as well. The slower growth of world trade hampered the country's exports, which recorded a pitiable negative 5.1 per cent growth. It could have put pressure on the rupee. But that didn't happen, thanks to low imports, a record low in crude-oil prices and foreign-exchange reserves of nearly $30 billion (Rs 1,26,000 crore). Still, it's not as if the country is not paying the price -- literally -- for profligacy. Prices of primary articles went through the roof (remember onions?) and the fear of double-digit inflation looms large: money supply's been growing too fast (19.5 per cent year-on-year between April and November). The RBI report, too, voices some concern at the growth of money supply, despite substantial increases in the cash reserve ratio and short-term interest rates. In fact, it's in part due to the RBI's money management policies that interest rates have not firmed up. Jha believes that the increased pressure of borrowing, combined with the desire to maintain the stability of the Indian rupee against the dollar, will lead to a hardening of nominal interest rates in the coming six months. But what does all this mean in practical terms? For one, analysts predict GDP growth will fall to the 4.5-5 per cent range while the fiscal deficit will increase to anywhere between 6.2 per cent and a grimmer 7 per cent (budget estimates had placed the deficit at about 5.6 per cent). Jardine Fleming India Broking Economist Rohini Malkani believes the last figure is more likely, although the Government is likely to window dress the figures to show about 6.5 per cent. She adds that there will be a fiscal slippage of over Rs 20,000 crore. Window dressing for the Government can take several forms, from delaying refunds and paybacks from the oil-pool surplus account, buyback of PSU shares by companies and financial institutions, to delaying the voluntary retirement scheme and perhaps tinkering with non-planned expenditure. Of course, these are just temporary measures which will merely carry over the problems to the next year. The wages and interests bills, though, will continue to haunt the Government through this financial year. Interest costs are certainly nothing short of ghastly. At
present, the outstanding debt stock of the Government stands at a mammoth 53.9 per cent of
GDP; interest obligations, therefore, account for nearly 28 per cent of all fiscal
expenditure. And given the present ratio of debt servicing to current borrowings, in effect, for every Rs 100 that the Government borrows, it has to repay Rs 135. Points out Credit Rating and Investment Services India Ltd Managing Director R. Ravimohan: "The interest burden is growing. It will continue to rise until government debt is restructured. That cannot happen until huge divestments take place." Clearly, then, the finance minister has some tough decisions ahead. The BJP Government's second budget is due next month, and it's unlikely to echo the last budget's blustering optimism. Sinha has some difficult choices ahead of him -- he will need to find the least painful way of curbing expenses, at the same time provide an impetus for growth. His path seems clear: he needs to reduce the level of public debt and find ways to fund infrastructure. Right now, capital expenditure accounts for barely 21 per cent in the budget. But what do the analysts predict this time? Says Jha: "We'll see a continued emphasis on investment in agriculture. There will also be some temptation to increase import tariffs as industry is virtually crying out for it." Ambitious growth targets, too, are likely to make way for some kind of restructuring of the food subsidy distribution network and a continued emphasis on disinvestment. As Ravimohan puts it: "It's going to be a tough budget. It needs to be tough to salvage the situation." The promised September revival didn't happen in 1998. Unless Sinha acts, it's unlikely to happen in 1999 as well. |
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There's good news and there's bad news.
The good news is that the economy isn't in as bad a shape as you thought. The bad news is
that it's worse. The Reserve Bank of India's (RBI) Report on Currency and Finance
confirmed what doomsayers have been saying for a while now: the country's fiscal accounts
are in complete disarray. Growth targets for 1998-99 which were dubbed unrealistic now
look distinctly unachievable. 
