Is it too early?
The worry over fiscal deficit may be presumptuous
Ours is essentially a tragic age, so we refuse to take it tragically. The cataclysm has happened, we are among the ruins, we start to build up new little habitats, to have new little hopes. It is rather hard work: there is now no smooth road into the future, but we go round or scramble over the obstacles.'' But this was in the times of Lady Chatterley's Lover. For analysts keeping track of the economy in India and the government headed by Narendra Modi, the cataclysm came in the form of the decision to issue additional dated government securities during the current financial year.
First, the calamity. The Government of India informed that it will raise additional market borrowings of Rs 50,000 crore during the remaining period of the financial year ending March 31, 2018, through dated government securities. Though the communique mentioned that against the long-term (dated) borrowing the government would reduce short-term borrowing (that is through issue of T-bills) by Rs 61,000 crore, thus trimming down net market borrowing by around Rs 11,000 crore; but, the message was read as and a leading business paper said, "The Centre looks set to breach the fiscal deficit target this year, with lower-than-expected revenue prompting it to go for additional borrowing of Rs 50,000 crore from the market.''
The borrowing is over and above the budget estimate of Rs 5.80 lakh crore gross market borrowing for 2017-18. The reason why pundits are alarmed is that this will hurt fiscal balance raising the deficit from a target of 3.2 per cent of the gross domestic product (GDP). It is variously estimated to breach last year's level by 0.3 per cent to 0.5 per cent. Two factors are causing the alarm. First, it has been an accepted axiom that fiscal deficit has to come down year after year, at worst remain at the same percentage of the GDP as the year before. As increasing the rate of the fiscal deficit is like inviting doomsday. Second, the possibility of a rising share of fiscal deficit to GDP is staring at India for the first time in four years – a calamity unheard of – at least for four years.
Fiscal deficit as an important component to gauge the health of an economy came in the Indian dictionary after 1991, when the Narasimha Rao Government had to bite the bullet and embark on liberalisation against the previous licence-control Raj. This was a natural consequence of accepting the rules of the global financial architecture. Before that, governments the world over could run budget deficits for decades. Charles Wyplosz wrote in the 2013 volume of the National Bureau of Economic Research that, since 1960, all the member countries of the Organisation for Economic Cooperation and Development (OECD) had been running budget deficits. In fact, Wyplosz pointed out that countries like France, Austria and Greece achieved a surplus budget only before the first oil shock in the early 1970s. Deficits were more of a rule than the exception in these AAA-rated countries, for fifty years. Between 1960 and 2011, countries which ran deficits over 90 per cent of the time included the US, Portugal, France, Belgium, and Italy.
Actually, the point Wyplosz highlighted was that fiscal discipline is a medium-term to long-term concept allowing slippages depending upon unavoidable circumstances. Even if a government maintains a solid budgetary principle, it may have to deviate, compelled by private debt turning into public debt. A case in point is the US in 2008. Hit by a massive debt crisis in companies 'too big to fail' the land of free market economy had to resort to an emergency funding plan and effectively nationalise these companies. Washington created the "Troubled Asset Relief Program" worth $700 billion. The US Congress authorised the Obama administration through the Emergency Economic Stabilisation Act of 2008, to infuse cash into the nation's banks to keep them operating. The government lent money and bought stock ownership in GM and Chrysler. It also provided incentives to spur new car purchases. In effect, the government nationalised GM and Chrysler as also Fannie Mae, Freddie Mac and AIG. Nobody talked of increasing fiscal deficit then.
This brings us to the much-hyped issue of independence of the Central Bank. No Central Bank can escape such an emergent situation, howsoever independent it might be. Federal Reserve of the US did not even squeak, let alone protest when Washington under President Obama bailed the private companies out with the taxpayers' fund.
This, however, does not mean there need not be any discipline imposed on the budgetary process. There are two factors which necessitate a tether on budget office going berserk. First, there is always a tendency to shift the burden of balancing on the next government or worse, the next generation. Second and no less critical, is the political establishment's penchant to appease interest groups which ensure higher chunk of voters for it. Debt write-off is a common enough example in India. This is the most favourite of successive governments, both at the Centre and states, since the burden is on banks – mostly state-owned with no pressure on the exchequer.
Now, take a look at the issues which compel the government to increase its borrowing limit. A new taxation system has come into effect. It needs time to stabilise—more so, since there is resistance at the ground level to accept GST. Without going into the reasons for the same and the politics underlining it, the fact remains that the system needs breathing space before the estimated shortfall in collection can be covered. The circumstances for breaching the fiscal deficit limit are well accepted by academic literature.
Second and no less important is the fact that, how much will be the deficit as a percentage of the GDP is debatable at this juncture. It will depend upon the GDP growth rate in the second-half. In terms of current prices (backed by, like it or not, a higher rate of inflation), GDP may be higher than it is being visualised by many. The rate of increase in the GDP and the final debt figure will determine if fiscal deficit will rise alarmingly enough to deserve the kind of worrisome reports being peddled now.
To sum up, cataclysm has not happened. But the fact is that ours in India is indeed at a tragic age. Here we cry catastrophe too often without thinking hard enough. Could it be that certain policy makers are despised by the pundits so strongly that we love to cry wolf even when none is nearby?
(The views expressed are strictly personal.)