Comment

This is not the right time to dwell on the virtues of fiscal rectitude.

If the contagion effect of the global economic woes is felt in India as well, the government is indeed obligated to act with dispatch and boldness to insulate our economy from these dangers.

The classical remedy to combat the downturn is through a boost to spending; in this setting, the slew of measures announced by the Centre, with the Reserve Bank coming out with a monetary stimulus of its own, is commendable.

The fisc would come under pressure, no doubt but if the prescriptions work as intended, the risk is worth the effort.

So, in essence, if the fiscal deficit doubles to 5% of the gross domestic product during the current year from the targeted 2.5%, it should not engender undue concern.

The cost of the fiscal package is estimated at 2% of the GDP and if the overall ratio is to stay at 5%, then, the fiscal deficit, originally spelt out in the budget cannot deviate by more than 0.5% to 3% of the GDP.

Since this figure, adjusted for the booster dose, would still conform to the Fiscal Responsibility and Budget Management Act, the Centre cannot be faulted.

But, the troubling question is, whether the government can stick to the fiscal deficit target, at 3% of the GDP, without reckoning the extra liability now imposed upon it in the wake of the crisis engulfing the economy?

This is well nigh impossible. For one, the budget did not provide for big-ticket spending items like farm debt waiver scheme and the outgo on account of the Pay Commission’s recommendations. In this sense, the fiscal arithmetic was flawed right from the outset.

Second, as the mid-year review notes, revenue receipts during the first half of 2008-09 have been better than in any of the preceding five years and that no shortfall was anticipated during this fiscal. So, on the revenue front, there is no reason to worry, thus far at least.

But, in regard to expenditure, the trend is indeed disturbing. The two batches of supplementary demands for grants project the total spending, involving a cash outgo, at over Rs 148,000 crore.

Contrast this with the budget estimate of the fiscal deficit — Rs 133,287 crore.

Even if the wonted buoyancy in revenue in the second half prevails - a questionable assumption in view of the across-the-board cuts in excise duty and other giveaways — the fiscal deficit may rise close to 5% of the GDP, to which the cost of the economic stimulus needs to be added.

In short, if the fiscal deficit soars to over 7% of the GDP during 2008-09, one should not be surprised.

Third, the threat to the fisc emanates from the known quarter - subsidies.

According to the first and second batches of supplementary demands for grants, more than Rs 11,000 crore would be spend on account of food subsidies, taking the total to Rs 45,720 crore.

Likewise, gross fertiliser subsidy would zoom past the Rs 100,000 crore mark from the originally envisaged Rs 34,382 crore.

In a word, the budget had underestimated the expenditure under several key heads.

This is not all. During the current year, the off-budget liabilities also threaten to shoot up.
Already, the oil bonds have reached a level of over Rs 65,000 crore, while the fertiliSer bonds are set to touch Rs 16,000 crore inclusive of the amount earmarked in the latest supplementary demands for grants. Cumulatively, off-budget liabilities may approximate to Rs 100,000 crore.

There is a lingering suspicion. Is the officialdom using the crisis as an alibi for covering up its failures on the budgetary front?

The mid-year review avers that, “so far the macroeconomic impact of the global financial turmoil has been relatively muted due to the overall strength of domestic demand and the predominantly domestic nature of financing of investment”.

It added that, while a slowdown was inevitable, through a right policy mix, the economy could minimise the dislocation to its growth trend.

Borrowings may be resorted to on a large scale but, in stead of recharging the economy, they may be deployed to meet non-productive spending.

The time to sing the requiem to the FRBM Act has come, despite averments to the contrary by the government.