The UPA government has completely messed up its finances. Faced with falling tax revenues and huge expenditure increases in an election year, it is printing currency notes like crazy to make ends meet.
At last count, the government had already “monetised” — ie printed notes — worth Rs66,946 crore to bridge the yawning gap between revenue and expenditure. As we near elections, it will print more in the hope that some of it will translate into votes.
Whenever the government wants to borrow more than what people are willing to lend it, it simply passes the hat around to the Reserve Bank. It is technically called borrowing, but in reality it is tantamount to printing money to pay for its expenditure.
With so much “monetised” money sloshing about in the economy, the net result is often higher inflation - after a lag. So, if you are celebrating the dramatic drop in inflation from nearly 13% in August last year to just over 5% now, don’t. The inflation dragon has only gone into hibernation. It will return.
The reason why the centre’s finances are in a shambles is populism. In last year’s budget, the centre announced a Rs60,000 crore farm loan waiver. Then there was the Sixth Pay Commission report, and the huge oil and fertiliser subsidies. The net result: as at the end of December 2008, the centre’s fiscal deficit -gap between revenue and expenditure that has to be bridged by borrowings - had already spiralled to Rs2,18,262 crore. And this is merely official deficit. Unofficial deficit - which includes oil and fertiliser subsidies that are not shown in the budget - is much higher at Rs3,04,204 crore. And that’s a conservative estimate.
The 2008-09 budget had pencilled in only Rs1,33,287 crore as fiscal deficit. The gap between the real fiscal deficit and the budgetary claim has resulted in huge additional borrowings and a frenetic printing of notes.
n Cash balance with RBI falling
Cash balance with RBI falling
The UPA government has “monetised” — ie printed notes — worth Rs66,946 crore to bridge the yawning fiscal deficit.
As of January 30, 2009, the monetised deficit of the government stood at Rs 66,946 crore. This recourse to credit from the Reserve Bank suggests that traditional avenues of financing the deficit are not sufficient. Already, more than a quarter of the fiscal deficit as of December 2008, has been met by borrowings from the central bank. Worse still, more of the same may be in the offing as the year draws to a close.
Why? The facts tell their own tale. The economic stimulus package entails huge expenditure. On the other hand, the revenue front is far from rosy. Duty cuts in indirect taxes will render the exchequer poorer by Rs10,000 crore while the slowdown in economy will hit even normal flow of receipts.
Now there’s news that, even in regard to direct taxes, the picture is less than sanguine. A Rs100,000 crore revenue shortfall stares us in the face.
The gross borrowing programme of the centre is set to go up to Rs2,52,154 crore from the originally envisaged Rs1,78,575 crore. The Reserve Bank has indicated that more borrowing to the tune of Rs50,000 crore is likely before March 2009.
Thanks to huge spending, the centre’s cash balances with the Reserve Bank are falling. Till December 2008, there had been a drawdown to the tune of Rs60,959 crore in cash holdings - the budgeted figure for 2008-09 is only Rs7,224 crore. Besides, the government has availed itself of ways and means advances of Rs11,654 crore. As the exchequer comes under strain, it is a safe bet that the Reserve Bank’s credit to the centre, that is “monetised” deficit (defined as Reserve Bank’s holdings of treasury bills, and bonds adjusted for the government’s cash balances), will also swell.
So, brace for higher inflation later this year or in 2010.