The ballooning fiscal deficit has left Manmohan & Co between a rock and a hard place.
By Ashok Malik
IT IS necessary to place the Congress-led UPA government’s sudden talk of economic reform in context. On 31 August, India’s Controller General of Accounts released figures that said the fiscal deficit for the first four months (1 April-31 July) of 2012-13 had reached 51.5 percent of the Budget estimate for the entire year. Presenting the Budget in March, the finance minister had committed to a fiscal deficit of 5.1 percent of GDP. There are now concerns this may cross 6 percent. In 2011-12, the government had promised to limit the fiscal deficit to 4.6 percent of GDP, but the actual number was 5.9 percent.
Two successive years of such runaway public spending have wrecked the financial system and crowded private investment. International rating agencies are at the cusp of a serious downgrade of India. This year, the government does not even have the excuse it had in 2011-12, when oil prices where high and crude imports and resultant subsidies placed an extraordinary burden on the public exchequer. In contrast, crude prices have softened in 2012. The government’s first priority, therefore, is to restore the integrity of the fiscal deficit target. It is worth noting that even the Rs 5 a litre increase in diesel prices, along with the cap on cheap LPG, will trim the oil subsidy bill of Rs 1,87,000 crore by just 11 percent.
It is not rocket science that cutting the deficit means either curbing expenditure or raising revenue. Part of the reason the deficit is abnormally high is that the UPA government has simply spent its way into trouble over the past eight years, with loan concessions and expansive welfare programmes that have drained a legacy of prudence and growth. However, instinctually, the Congress finds it difficult to curb its populism. Indeed, the Food Security Bill, expected to be introduced in Parliament in the Budget Session of 2013, could add to the pressure on the deficit.
That leaves the government with the option of getting more revenue. With growth plateauing and tax collections not surging as they have in recent years, organic methods are obviously not going to be enough. As such, Finance Minister P Chidambaram is placing his faith in ad hoc mechanisms such as the auction of 2G spectrum — mandated to take place by January 2013. Despite the government’s valiant defence of the telecom allotments of the A Raja years and the insistence on a “zero loss”, the fact is the Rs 14,000 crore reserve price for the auction, which is occurring precisely because the Raja-era allotments were cancelled, is going to come in very useful.
Next, there is potential revenue from disinvestment of select public-sector companies. The March 2012 Budget proposals had envisaged a disinvestment target of Rs 30,000 crore. In 2011-12, the disinvestment aspiration was Rs 40,000 crore but receipts were only Rs 14,000 crore. The target for the current year is eminently achievable but for that the stock market has to be buoyant and the mood optimistic. That is why the finance minister’s entire approach seems directed at talking up the economy and taking steps (FDI in retail and aviation; downplaying the retroactive tax) that will improve sentiment even if they don’t have an immediate impact on the ground.
As such, the government’s actions are impelled by alarmism and have a strong element of window-dressing. Whatever it may claim, a sustained period of big-bang reforms is not something it has the political capital, parliamentary numbers (for the Pensions and Insurance Bills for example) or, given its own history, the credentials for. At the tail end of its term, there is only so much the Manmohan Singh government can achieve, even if it decides to miraculously overcome the self-imposed inertia of a decade.
Given this reality, it will suit the Congress to insist it is focussed on economic reform and being sabotaged by the Trinamool Congress. There is cynical hypocrisy to this, of course, but if it can get away with this mid-scene costume change, it will speak volumes for its political artifice. It will speak even more for the inability of the main opposition party, the BJP, to capitalise on the government’s economic failure and its de-prioritisation of growth.
Ashok Malik is Contributing Editor, Tehelka.