Jan 25, 1999
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DEFICIT On Borrowed Time The finance minister's projection go awry as rising expenditure plays havoc with the fiscal deficit. By Sumit Mitra If your expenditure exceeds your income, how do you keep your finances going? By withdrawing cash on your credit card, by asking the bank manager for an overdraft, or by similar borrowings. It doesn't matter that living on borrowed money is not regarded as quite gentlemanly in the Indian context. However, it's good enough for a government whose total borrowings in a year are acceptably labelled as fiscal deficit.
However, the Finance Ministry is now carrying out a massive exercise to augment the Government's revenues as well as trim its expenditure. Besides, the Prime Minister's Office (PMO), anxious to avoid the embarrassment of having a dab of red ink on the national balance sheet, is writing its own prescription to fight off the menace. It's an uphill task though. On the revenue side, the current estimated shortfall is around Rs 12,000 crore. The Finance Ministry has decided to reduce it by a quarter simply by showing as receipt the unbudgeted yield of Rs 3,000 crore through the Samadhan scheme. Last year, Sinha proposed the scheme by which people clearing their tax arrears were offered immunity on interest, penalties and litigation. Direct taxes collections, which are estimated to exceed the 1998-99 budget target by at least Rs 2,000 crore, will further help reduce the gap. Besides, the ministry is confident of putting another Rs 2,500 crore into the kitty this year by selling the government shares in three PSUs -- VSNL, CONCOR and GAIL. But that still leaves a Rs 5,500-crore hole in the fiscal pocket. The ministry thinks the hole can be plugged by a 10 per cent cut in the budgeted Plan expenditure. That's a big-ticket item considering that Rs 72,200 crore was earmarked as the year's Plan expenditure. However, the gains made here may be negated by the soaring non-Plan expenditure on subsidies and on the pay and allowances of the four million Central Government employees. The rollback of the Re 1-per-kg hike in the price of urea fertiliser in June has cost the Government Rs 2,000 crore. On the salary front, the Group of Ministers headed by Home Minister L.K. Advani is now trying to remove the anomalies in the award of the Fifth Pay Commission, against which the employees had been agitating. The full redressal of these grievances may leave the exchequer poorer by Rs 3,000 crore. Pushed into a corner, the Finance Ministry thought up an innovative plan for strategic sale of government shares in half a dozen companies like Maruti Udyog Limited (MUL), Indian Oil Corporation (IOC), National Mineral Development Corporation (NMDC), Modern Foods Limited, Bharat Aluminium Company (BALCO) and Kudremukh Iron Ore Company. However, the biggest stumbling block for PSU disinvestment is the Cabinet itself. Steel Minister Naveen Patnaik has opposed the disinvestment in NMDC, BALCO and Kudremukh Iron Ore on the sentimental ground that "baba" (his father, the late Biju Patnaik) would not have permitted it. Industry Minister Sikander Bakht, who last year allowed MUL's Japanese joint venture partner Suzuki Motor to regain management control over the company, now prefers not to dilute the government's stake from the existing 50 per cent. He is unmoved by the Finance Ministry's logic that the share value of MUL may drop, and certainly not rise, in the face of growing competition in the automobile market. He has even argued that the government shares in MUL might eventually fall in the hands of foreign players. Petroleum Minister V. Ramamurthy has strongly opposed the sale of IOC shares on a ground as emotive as Patnaik's: "The capital came from the hard-earned income of the people of India." The PMO reportedly wants the budgetary gap to be bridged with the Finance Ministry appropriating a part of the Rs 9,000-crore surplus in the Oil Pool Account (OPA). While the ministry has been silent about the merit of this plan, there is a general feeling that it is an unwelcome accounting jugglery. Last Year, the United Front government had converted a huge deficit in the OPA into bonds that were picked up by nationalised banks. Now there is a large surplus in the OPA as the international prices of petroleum products are sliding rapidly whereas government-regulated prices in India remain at high levels. Economist Suresh Tendulkar, who is a member of the Disinvestment Commission for PSUs, says that the propriety of transfer of OPA surplus to budgetary revenue "depends on the accounting procedure followed by the Government" but "if it is shown as a capital receipt, that'll be robbing Peter to pay Paul". RPG Group economist D.H. Pai Panandikar says it will defeat the purpose of the OPA surplus, which is to retire the debt to banks. Sinha is unlucky as he took charge of the ministry when the economy was in a downturn and excise and customs revenues were in a tail-spin. He has also paid a price for the over-zealousness of his predecessor, P. Chidambaram, in showing his wizardry at augmenting revenues. The Revenue Department has paid as tax refund Rs 7,600 crore this year, which is twice the refund paid in the previous year. The steep hike in the government's wage bill, and the non-implementation of the Fifth Pay Commission's other recommendation to reduce employees, are also the handiwork of the previous regime. As the fiscal deficit overshoots target, the finance minister can do little but throw his hand. As most prisoners of history do. |
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Nevertheless, economists the world
over are getting increasingly jittery about fiscal deficit which, as it is argued, turns
the government into such an avid borrower that the private borrowers are "crowded
out". That's a recipe for economic stagnation. India has a horrible track record of
fiscal deficit management. Through the '90s, the average fiscal deficit was 6.3 per cent
of the GDP. Finance Minister Yashwant Sinha promised in the last budget a fiscal deficit
of no more than 5.6 per cent. But, from the trends available till October last, the gross
fiscal deficit seems headed to touch Rs 1,04,000 crore, or 6.6 per cent of the GDP, by
March 31. This is a good Rs 13,000 crore more than what Sinha had promised. 
