Budget 2012: Ponzi scheme just got bigger

“I must be cruel only to be kind,” said the boyfriend after we had both finished listening to the soporific budget speech made by the finance minister Pranab Mukherjee.

“You must be cruel only to be kind. What’s on your mind?” I asked.
“Arre I was just repeating what Pranab da said in his budget speech,” he explained.

“Oh, he quoted Shakespeare? Did he?” I asked. “I must have dozed off.”
“Yup!”
“And not Robi Babu?”
“Robi Babu?”
“Robindronath Thakur!”
“Ah.”
“And now, he will have Mamata di running after him just for that.” 
“For what?” asked the boyfriend.
“Well, since when did Bengali bhardralok start mouthing Shakespeare and not Robi babu.”
“Hmmm. True!” said the boyfriend. 
“The times sure are a changing!”
“So they seem,” he replied.
“So, no doubts today?” I asked.
“Actually I did have a doubt.”
“Tell me.”
“What is fiscal deficit?” he asked.
“I have told you so many times before, it is the difference between what the government earns and what it spends.”
“Yes you have. I wanted to know what he meant by revised fiscal deficit?”
“Well, in last year’s budget speech, the finance minister made an estimate of what the fiscal deficit is likely to be in the financial year 2011-2012. That was a budget estimate. Now a year later he has some semblance of what the real expenditure has turned out to be.”
“And that is the revised number.”
“Actually a revised estimate,” I corrected.
“Why still an estimate?”
“One because the financial year 2011-2012 is still on and ends on March 31, 2012. And also because the expenditure numbers might get revised along the way.”
“Ah, that way!”
“Yup. But tell me something isn’t fiscal deficit expressed as a percentage of GDP?”
“Yes it is.”
“Why?” he asked.
“Primarily because a standalone number wouldn’t make sense. If you say a country’s fiscal deficit is Rs500,000 crore and ten years back it was Rs50,000 crore, which one is worse? Just because one number is bigger than the other doesn’t make the situation worse. In ten years time the overall economy may have grown 15 times. Is the situation still worse?”
“I get what you are suggesting.”
“So fiscal deficit is expressed as a percentage of GDP to make it comparable across time.”
“But then there must be some disadvantages to this?” he asked.
“Yes they are. Take the case of India’s fiscal deficit. The revised estimate for the year 2011-2012 has come at 5.9% of GDP. That doesn’t perhaps give a layman the grimness of the scenario. The expenditure for the year 2011-2012 has been estimated to be at Rs1,318,720 crore. In comparison the government’s income for the year is at Rs7,96,740 crore. Hence in simple English the government spends 65.5% more than what it earns.”
“And that difference is the fiscal deficit.”
“Yes and that difference works out to Rs5,21,980 crore. Now when we compare the situation in this way we come to realize that the government is spending much more than what it earns. This difference it makes good by borrowing.”
“Yes. 5.9% of GDP never gives you the same flavour.”
“And that is one just one part of it.”
“So you have more to say?”
“See for the financial year 2007-2008 the fiscal deficit stood at Rs1,26,912 crore against Rs5,21,980 crore for the current financial year. Now what does that tell you? In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs7,96,740 crore.”
“Oh, really,” he said.
“Yup. So you don’t need an economist to realize that there is a major problem. In fact when the finance minister made his last budget speech he said that the fiscal deficit for the year will be 4.6% of the GDP or Rs4,12,817 crore. But the government ended up spending almost 26.4% more during the course of the year,” I explained. 
“But isn’t increased government spending good? I mean it would be creating some sort of assets which would be beneficial for people. Better infrastructure is one example.”
“Fair point. But look at the breakdown of the expenditure. Nearly 88% of the expenditure this year is revenue expenditure, which means the government is just about able to meet its running expenditure. Even for next year the revenue expenditure has been projected at nearly 86.3%. They are barely able to spend any money on creating assets.”
“That is a disaster. It sure is.”
“The revenue expenditure includes a lot of subsidy on petrol, diesel, LPG, fertilizers, kerosene! As a known stock bull said on TV the other day, even Saudi Arabia doesn’t sell kerosene at the price at which we do. And that is why a lot of kerosene gets smuggled into neighbouring countries and is used to adulterate diesel and petrol.”
“So we are in a precarious position.”
“Yes we are. You told me that the fiscal deficit is financed through borrowing. But on this
borrowed amount interest needs to be paid. The amount itself needs to be paid off.
How does the government manage that?” he asked.
“Look at the current financial year’s numbers. The interest payment for the year on money that has already been borrowed to finance past deficits stands at Rs2,75,618 crore or 52.8% of the fiscal deficit or the money being borrowed to meet the expenditure for the year. The next year’s projections are even more interesting. The interest payments at Rs3,19,759 crore amount to 62.2% of the fiscal deficit of Rs5,13,590 crore. What this means is that nearly 52.8% or 62.2% of borrowed money is just being used to service past debt. The government does not earn enough money to pay back the interest on its debt. So what does it do? It takes on more debt to pay interest on its existing loans. And other than the interest to be paid a certain portion of the borrowed money needs to be repaid every year as well.”
“Hmmm.”
“So the government has to borrow more in order to pay back its previous loans. A perfect Ponzi scheme!”
“Ponzi scheme?”
 The word Ponzi comes from Charles Ponzi, an American-Italian, who in the year 1919, promised to double investors money in 45 days. What he essentially did was to create an illusion of a successful business by using the money brought in by new investors to pay off the old investors. Essentially, the capital of the scheme was used to pay interest as well as repay the money invested. This is what is happening with most governments the world over now, including the Government of India.”
“So what is the way out?”
“Spend less. Earn more.”
“As simple as that. And what about the next year’s targeted fiscal deficit of 5.1% of GDP?”
“And cows will fly!”

Chandni Burman Financial services professional