Printing money to meet the gargantuan appetite for funds of the Centre was resorted to with a vengeance in the just concluded fiscal.
Industry captains have pleaded for it and the Reserve Bank of India (RBI) has demurred on grounds of its short- and long-term consequences, but printing money to meet the gargantuan appetite for funds of the Centre was resorted to with a vengeance in the just concluded fiscal.
As of March 27, 2009, monetised deficit of the government was a mammoth Rs 148,526 crore. With four more days to go before the month ended, the final figure for 2008-09, when it comes out, may be different but the magnitude of money created out of thin air is likely to be very, very large.
This is worrying as it means an open sesame to inflation, after a lag. The common man has to brace for tough times on the price front.
So, in addition to massive floatation of market loans, running down of its cash balances with the RBI and availing of the ways & means advances facility, security presses also worked at frenzied pace to print currency notes to get around the fiscal logjam the Centre found itself in.
Whatever the reservations of the central bank on this score, fiscal compulsions seem to have triumphed over economic logic.
The revised estimate of the fiscal deficit for that year was Rs 326,515 crore. This means that, around 45% of this receipts-expenditure mismatch has been met via newly printed notes.
This quickfix solution to our fiscal ills has many takers, given the crowding out effect of large-scale government borrowings from the market on interest rates and the need to stimulate investment in the economy but it also entails a cost in the form of resurgent inflation — which is a kind of tax with the poor taking the brunt.
It is not a painless remedy but given the pressure on spending due to farm loan waiver, implementation of the Pay Commission’s recommendations, National Rural Employment Guarantee and bloated subsidies, not to mention the tax giveaways and boost to capital spending, as a part of the budgetary stimulus package, recourse to RBI credit was inevitable.
But what is surprising is the extent of monetisation, at close to Rs 150,000 crore in addition to market borrowing which too has been jacked up considerably last year — from the budgeted Rs 100,571 crore to the revised figure of Rs 261,972 crore in net terms — and drawdown of cash balance from the original amount of Rs 7,224 crore to the now estimated Rs 29,984 crore as well as tapping the ways and means advances to the tune of Rs 22,150 crore as of end-February 2009.
Shocking though the extent of monetised deficit may seem, the practice of printing money to meet the deficit has been a fixed feature of our budget since the mid-fifties.
The Fiscal Responsibility and Budget Management Act, 2003 ended the practice of RBI buying government securities from the primary market and also of the Centre directly borrowing from the central bank except via Ways and Means Advances to meet temporary cash needs.
To its credit and despite pressures on the fisc, the Centre complied with the FRBM Act and, with the exception of 2005-06, had a surplus with the RBI.
In 2007-08, this surplus was as high as Rs 116,772 crore. But 2008-09, fiscal discipline went overboard and as the budgetary projections went haywire and economic woes multiplied, the government was forced to rewrite the budgetary arithmetic.
But, sad to note, even the revised data presented as part of the vote-on-account budget for 2009-10, do not seem to be reliable.
The revised revenue deficit for 2008-09 was Rs 241,273 crore but as of February 2009, this deficit has been surpassed to reach a level of Rs 244,513 crore.
So, in all probability by the end of that fiscal year, revenue deficit may be way above the revised estimate.
In the case of the gross fiscal deficit, by the end of the April 2008 —- February 2009 period, the figure has approximated to Rs 307,133 crore or 94% of the entire year’s projected Rs 326,515 crore.
Similarly, in regard to drawdown of cash balance, the actual as of February was Rs 60,598 crore, while the revised estimate for the entire 2008-09 was much smaller at Rs 29,984 crore.
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