“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics,” said economist and political commentator, Thomas Sowell. Politicians in elected democracies like ours know that all too well. As does the public.
So, with the next general elections looming large, opinion was divided between those who believed GoI would take to heart Sowell’s ‘first lesson of politics’ and junk the first lesson of economics (read: give a go-by to fiscal prudence). And those who believed that — in keeping with its track record and a wary eye on foreign rating agencies — finance minister Arun Jaitley
would treat the fiscal deficit
(FD) target as sacrosanct and stick to the 3.2% announced in Budget
The Right Dose
In the event, he chose neither. He opted, instead, for the middle path, taking a pragmatic view of FD target. So, he breached the target, but only by a tad and settled for an FD of 3.5 % of GDP
for 2017-18, against the Budget estimate of 3.2%. For the next financial year, he favoured a similar nuanced approach, opting to return to a more fiscally prudent glide path, but gradually, and settled for a target of 3.2% of GDP instead of the earlier number of 3% for 2018-19.
There is sound underpinning to this logic. Remember, this is a year in which we are still recovering from the pangs of demonetisation and goods and services tax (GST) is a work in progress. In such a scenario, blind adherence to a somewhat arbitrarily determined FD number would have resulted in a needless squeeze on capital expenditure. To the detriment of much-needed growth.
At the same time, higher slippage could possibly have jeopardised the BJP’s hard-won reputation of a government that sets great store by macroeconomic stability. So, even though the FM could have gone in for a higher slippage under the fig leaf of the NK Singh committee’s recommendations (0.5 percentage slippage in FD target in case of structural reforms), he desisted. Sensibly.
He slipped, but only marginally. At a time when the private sector is unwilling to invest (for whatever reason, excess capacity, disruption, etc) and growth is below potential, he realised there is no alternative but for GoI to step into the breach. Rightly so.
Growth is the ultimate elixir for a host of ills: poverty, unemployment, poor infrastructure. So, government spending in excess of revenue will deliver growth. To some extent, this is correct. But if the higher deficit is due to higher spending on, say, capital goods that crowd in or incentivise private investment, rather than on wasteful current consumption that crowds out private investment, it is a gamble worth taking. ‘Nothing venture, nothing win’ is a wise motto both in macroeconomics as in our personal lives.
A Stitch in Time
So, is it full marks to GoI for its balancing act on the fiscal front? Not quite. Critics say there is no guarantee that a marginally higher FD, a higher than-budgeted FD, quality or the composition of the FD matters as much as the size. And here, unfortunately, GoI falls short by a wide margin.
The revenue deficit (RD), which is the more pernicious part of GoI’s overall deficit (as it measures the extent to which revenue expenditure exceeds revenue receipts), has been breached by a huge margin. As against the target of 1.9% of GDP, RD for the current fiscal is estimated to touch 2.6%. Unlike a breach in the FD, which can be defended if used to finance capital expenditure, slippage on the RD is indefensible. Yet, it accounts for almost 75% of the FD in the current fiscal and is estimated to remain high (67%) next year as well.
If that is not bad enough, there is more to come. The amendment to the Fiscal Responsibility and Budget Management (FRBM) Act 2003, which is part of the Finance Bill 2018, proposes to drop the words, “achieving sufficient revenue surplus”, from the long title of the Act. Further, any reference to the sustainability of the “balance between revenue receipts and revenue expenditure” that is presently required to be furnished in the Medium-Term Fiscal Policy Statement under Section 3(3)(i) of the Act is to be omitted.
Thus, future Budgets will not be obliged to give any information on whether GoI borrowing has been used for investment or for current consumption. This has huge implications not only for transparency in government accounts but, more importantly, for inter-generational equity and debt sustainability.
Remember, FD is financed by borrowing. When GoI borrows to invest, future generations, who bear the burden of repayment, enjoy the fruits of that investment. However, when government borrows to meet current expenses like salaries, interest payments and so on, the burden of repayment falls on future generations, but without commensurate benefits.
A high RD, which has been likened to borrowing to binge on the bar, is, therefore, the least defensible part of the FD. By seeking to drop all mention of it and hide it from public scrutiny altogether, GoI is doing the country a great disservice.