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ShareIf you are in a financially difficult situation, you can't get out of it by spending more.
But that is what most finance ministers try to do. The reason is simple. Unlike individuals (except crooks like Telgi), households and corporates, finance ministers have access to Nasik press, which is the banker of first resort.
The fiscal deficit is expected to reach 6.8% in 2009-10, compared with 6% last fiscal.
Earlier reports indicated that the deficit in the first two months of this fiscal reached 27.3% of the annual target. The deficit was Rs 90,760 crore during the April-May period, compared with the full-year target of Rs 3.32 lakh crore, the Comptroller and Auditor General of India said. The deficit was 55% of the annual target in the last year.
Due to slowing tax collections and increased expenditure, the central fiscal deficit has widened to 6.8% of GDP and will increase the central government's borrowings to Rs 4,51,000 crore this fiscal. Combined with states revenue gap of 4% of GDP, India's combined deficit will widen to nearly 11%, which is half of household savings. It is important to note that many other items, like the deficit of PSUs, etc, are not included in this even though they also belong to the government.
This brings us to the important issue of Fiscal Responsibility and Budget Management Act (FRBM), which requires the government to cap fiscal deficit at 3% of GDP and eliminate revenue deficit. The current situation is a mockery of this act.
The reaction of the stock markets has been covered well by newspapers. Sensex declined 5.8%, or 870 points, after the Budget, indicating the markets are not happy. Some argue that the share market is not the FM's audience. His target is the aam aadmi.
The government plans to borrow Rs 40,000 crore and raise around Rs 10,000 crore through disinvestment. The disinvestment debate is a never-ending one. When the public sector is doing well, it is suggested that the 'family silver' shouldn't be given to private capitalists, etc. If it makes losses, then it is suggested it needs to be turned around to become attractive for disinvestment. Once they are turned around, the 'family silver' argument comes back in.
Plus we have the regional chieftains who oppose disinvestment of central undertakings in their states, like DMK in Tamil Nadu and Trinamool Congress in West Bengal.
While presenting the Budget on July 6, the FM said goods and services tax (GST) would come into effect from April 2010. The implementation of GST will lead to the abolition of other taxes such as octroi, central sales tax, state-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, etc, avoiding the multiple layers of taxation that exist now. It is estimated that India will gain Rs 60,000 crore a year by implementing the GST as it would promote exports, raise employment and boost growth. But many of the states, including Tamil Nadu, Maharashtra, etc, aren't ready for the shift and so, it may not be realised for another 2-3 years.
Then the government will be in a jam. Printing notes will be an easy option and herein lies the looming crisis for the aam aadmi. There is lots of news regarding inflation being at negative rates, etc. But that is the wholesale level prices and not retail inflation. At retail level, it is at 10% and in specific items like vegetables, dal, rice, oils, it is over 10%, sometimes touching 15-18% in specific regions. The failure or delay of monsoons in northern parts of the country will add to the problems. The inflation demon will rage in full form, maybe reaching 20% at the retail level and that would hurt current dispensation.
One cannot spend more to come of out of a cash crunch, even if one has access to the Nasik press.
The author is professor of finance and control at Indian
Institute of Management-Bangalore.
Views expressed here are personal and do not reflect those of the organisation
