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ShareMisgivings about the move's rationale and the fisc's ability to pay for it remain
P Chidambaram is incorrigibly optimistic. At least, that is how he sounded while announcing the farm debt waiver two weeks ago.
It is another thing that misgivings about the rationale of this far-reaching move and the ability of the fisc to pay for it without landing the exchequer in dire straits have persisted since that announcement was made.
The Union finance minister has made light of these concerns. "We should be able to finance the package in each year out of the buoyancy in tax revenues alone," he said.
Also, by deliberately pegging the fiscal deficit at 2.5% of the gross domestic product for the next year, the FM said he had ensured that there was "enough head room to borrow." "This, however, will be the last resort," should non-tax revenue and non-debt capital receipts also prove inadequate.
Is the formula realistic and feasible? Or, is it too simplistic and flawed and therefore liable to go awry?
There are two sides to the Budget and the finance minister has focused only on the receipts matrix. He has ignored the intractable nature of several heads of government spending in his speech, save for a reference to "efforts at expenditure restructuring." He has not elaborated on how the reshaping of expenditure will come about or what concrete steps he has in mind in this regard. Throughout, he has focused on the buoyant revenues to pay for the debt waiver scheme, but has glossed over the more serious problem of "buoyant" expenditure.
At the heart of the fiscal crisis is the fact that real resource mobilisation lags woefully behind the pace of the Centre's spending. What if the incremental growth in receipts - both tax and non-tax revenues and non-debt capital accruals - is outrun by the trend in expenditure throughout the four years when the debt waiver financing is implemented? This is not a hypothetical question as this has been a regular feature of Union finances all these years. In fact, the failure to adhere to the timetable to transit to a zero revenue deficit by the end of the next financial year can be directly attributed to this state of affairs -- difficulty in economising and prioritising government expenditure.
Let us dwell at some length on this issue. During the current fiscal, subsidy payment has overshot the budget estimate by over Rs15,000 crore and will swell by another Rs12,000 crore next year; interest outgo will be up by over Rs21,000 crore this fiscal and a more or less similar order of increase is projected for 2008-09. With crude oil prices on a bull run, the government had opted to issue oil bonds and bonds to fertiliser companies have made their debut.
This may well be the trend in the coming years, too. These may be off-budget liabilities but interest burden on a recurrent basis till redemption date will strain the fisc already under pressure. If this is the ground reality, how can the end result be different? If at all there is a compression in spending, it will in defence - which would be unwise - and in investment that may hurt the growth process itself or in social infrastructure, which may impinge on the quality of life of millions.
To complicate matters, the Sixth Pay Commission will soon submit its report and on a conservative reckoning, an extra liability of Rs15,000 crore on this account is likely, besides projected arrears of at least twice this sum.
Expenditure has an in-built momentum of its own, which the FM ignored while detailing the farm loan waiver.
As for non-tax receipts and non-debt capital revenue coming to the rescue of the government, should tax buoyancy prove inadequate, this is plain wishful thinking. On an incremental basis, the funds from these two sources will be relatively small. The increase projected for 2008-09 is Rs2,440 crore under non-tax revenue; in the case of non-debt capital receipts, the fresh mop-up will be around Rs8,000 crore. All of these additional resources may not be available to finance the debt write-off.
The arithmetic fails to convince, though Chidambaram could carry the House with its populist appeal. The moral hazards involved and the domino effect the measure could have were lost in the crescendo of approval that followed. This speaks volumes about the present political milieu. What a pity.
