The hard way

Fiscal deficit for FY 2022-23 is estimated to be at Rs 16,61,196 crore, which is expected to be met by market borrowings to the tune of Rs 14.95 lakh crore. The deficit for this year (6.4 per cent of the GDP) is less than the revised deficit for the last year (6.9 per cent) but, eventually, it may go up as a huge government expenditure is promised. The agenda to boost long-term growth through building infrastructure is laudable and farsighted. However, the problems involved in moving for debt to address fiscal deficit are a challenge to the overall health of the economy, and as such there is a need to exercise caution.

How the government is going to bridge the fiscal gap is crucial from a macroeconomic perspective. Though the budget estimate for 2022-23 shows an increased share of direct tax collection (51.5 per cent of all taxes), it is not substantially higher than last year's revised estimate (49.7 per cent). Secondly, a gradual fall is observed in the direct tax to GDP ratio over the years. For example, despite a marginally higher tax-GDP ratio (10.7 per cent) in the budget estimate than that of last year (9.9 per cent), it is still lower than 11 per cent in FY 2017-18. This is a worrying sign in view of minimising fiscal deficit in future. Borrowing is unavoidable in order to promote growth but it is a double-edged sword. Firstly, the high interest rates on government bonds cause a huge additional burden of payments in future budgets and, secondly, capital expenditure may further increase due to inflation as it lowers the value of revenue collections. The primary deficit (i.e., excluding past debt service amount) obviously will increase year by year, necessitating more and more borrowing. How much a government should borrow and what could be the long-term effects of debt on the economic future of a nation are important questions.

Fiscal deficit has registered a dramatic increase in the last 5 years. While it was 3.5 per cent of GDP between 2016-17 and 2018-19, it suddenly shot up to 4.6 per cent in 2019 due to economic slowdown and reduction in tax revenues. The pandemic in 2020 catapulted it to 9.4 per cent as the economy was almost paralysed and GDP fell. Government debt, which was almost constant at around 70 per cent in the last decade, suddenly jumped to 90 per cent in the FY 2020-21. It's a challenging task for the government to bring down the 'Debt-to-GDP' ratio to the pre pandemic levels, even assuming a serendipitous state of no further increase in debt. The Fiscal Responsibility and Budget Management Act (FRBM), 2003 was instrumental in reducing the deficit to 2.5 per cent and debt-to-GDP ratio from 83 per cent in 2002-02 to 71 per cent in 2008-09. But the Act was amended in 2012 and 2015, relaxing the provisions of fiscal constraint. The FRBM review committee in 2016 advanced four economic arguments, rather recommendations, that form the basis for moving to debt: first, debt to be the ultimate objective of fiscal policy; second, debt ceiling combined with fiscal deficit as an operational target to provide a robust fiscal framework; third, with public debt close to 70 per cent of GDP, India was the most indebted country amongst emerging markets and; fourth, public debt exemplifies an important factor in the assessment of rating agencies. In short, Debt-to-GDP ratio must be a policy objective with a rule-based transparent framework. The committee has drawn a roadmap to reduce debt from 70 per cent of GDP in 2017 to 60 per cent by 2023, with an exemption for periods of economic crisis. However, of late, a liberal view towards borrowing seems to be diluting the spirit of the recommendations. For instance, according to the Economic Survey 2020-21, governments can be more 'relaxed about debt and fiscal spending' during either growth slowdown or an economic crisis. It appears that market borrowing is seen as a handy recourse to finance schemes and projects aimed to 'boost' growth even if the rule-based framework insists that it should be the 'ultimate objective'. Perhaps we need to revisit our policy vision regarding debt vis-a-vis deficit.

Studies have shown that when government's debt burden reaches an unsustainable threshold, it only retards the growth rather than stimulating it because servicing the past debt drains out the resources and disallows spending in new areas. So, the takeaway is to be circumspect while borrowing, in order to avoid falling into debt trap. Growth and development in developing countries cannot be promoted at the cost of future stability of the economy. Borrowing has to be resorted to only when public and private investments are crucial for the medium term to push growth potential and create employment. Such borrowings help countercyclical macroeconomic policy whereby fiscal consolidation is achieved through phasing out, without compromising on the agenda of public services or sustainable growth. At least, it had been the experience of South Africa during the global economic meltdown in 2008-09. With the disastrous impact of Covid on the world economy, in the last two financial years, the present times are not very different either. Countries of OECD followed various approaches but common to all is the motto — avoid living beyond the means.

France embarked on a path to unleash growth by creating a dynamic economy, initiating measures to remove impediments to enterprise creation, increase labour participation, and enhance business competitiveness with productivity. Germany introduced Constitutional provisions called Schuldenbremse, or "debt brake," which mandated the federal government to restrict debt to no more than 0.35 per cent of GDP until 2016 and banned the states of Germany (Länder) running structural deficits till 2020. Austerity drive was also initiated to achieve fiscal consolidation. Measures included reduction of subsidies and imposition of additional taxes on energy companies, airlines and financial institutions in the corporate sector. Germany believed in ensuring competitiveness, regulation of the banking sector and sustainability of the public finances as essential areas to address the fiscal gap. Specific consolidation instruments were introduced — aiming at the reduction in expenditure with least impact on economic activity — and the tax base was broadened where revenues were required. South Korea's fiscal policy struck a balance between momentum of economic recovery and fiscal consolidation to ensure market confidence and sustainable growth. Low tax rates and broad revenue base to encourage investment were prioritised while focussing on enhancing expenditure efficiency and performance evaluation. Financial discipline was strictly enforced by introducing sunset clause to state funded schemes and winding up ineffective programs. Mexico introduced reforms in four key areas: tax administration, government revenue, public spending and fiscal federalism. Performance-based efficient allocation was emphasised to curtail wasteful spending. New Zealand, while reducing personal and corporate taxes, increased GST on consumption to encourage competitiveness and promote exports and savings.

There are takeaways from international experiences in the debt versus deficit paradigm. Though it is difficult to attain an ideal debt-to-GDP ratio target as prescribed by FRBM review committee, gliding towards reasonable levels of debt is always achievable. Exploring multiple ways and means and endeavouring with perseverance to pool in finances will be a farsighted and practical vision to ensure fiscal space rather than finding comfort in debt markets. One immediate measure could be asset monetisation (privatisation). But alas, while this year's budget is silent on disinvestment drives, there is no news either about the privatisation proposal of some banks and insurance companies as announced last year. Likewise, the national monetisation drive announced last year concerning certain ports, railways, airports, roads also has not been made any headway yet.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal