ALARMING FISCAL DEFICIT
Vinod Anand | 16 Oct 2009
ALARMING FISCAL DEFICIT
Fiscal Deficit (FD) is the sum total of the budget deficit, borrowings, and other liabilities of the Government. Budget deficit is the difference between the revenue receipts (tax revenue and non-tax revenue) and the capital receipts (borrowing from the market, disinvestments proceeds etc.) on the one hand, and the total expenditure (both plan and non-plan, and revenue and capital), on the other.
There has always been a difference between the ex-ante fiscal deficit (that is announced in the budget) and ex-post fiscal deficit (that shows in the following months).
It is really surprising that India’s FD has touched a 45.5 per cent mark of the full-year estimate in the first five months of the current fiscal year (2009-10), though it is slightly lower than what it was during the first five months of the last fiscal year 2008-09. The Government had projected a FD of 6.8 per cent of the GDP for this fiscal year (2009-10), but the FD has recently touched 45.5 per cent of this estimate, i.e. it has reached to about 10 per cent of the GDP. This is too high. If one extrapolates this trend, it appears that it will go much beyond the 10 per cent level by March 2010. The optimal FD has to be around 3 per cent so that it does work against growth prospects.
Many reasons can be given to explain as to why this happens? If we remember The Kelkar Task Force (KTF) under the Fiscal Responsibility and Budget Management Act, 2003, had given two basic reasons for the lack of fiscal discipline in the country. These are: the declining tax-GDP ratio, and the increasing non-plan expenditure.
The Government must strongly focus on revenue mobilization to bridge the deficit. It must
· overhaul personal and corporate taxation;
· impose the doctrine of proportionality;
· compact the tax slabs and remove exemptions in a phased manner;
· simplify tax procedures; and
· lay special emphasis on service tax mobilization, which has great growth potential.
It is a highly welcome proposition, but there are many pertinent questions that can be raised. These are briefly mentioned below:
1. The ruling party is normally indifferent to all such suitable suggestions because the issue is highly delicate ‘politically’, and the Government does not want to take the risk of annoying its factions.
2. How exactly the Government will improve the weak governance, inefficient government machinery, and poor law and order situation, the ultimate objective of raising tax revenue to eliminate revenue deficit, and lowering the fiscal deficit?
3. We know that the rate of economic growth gets accelerated through fiscal discipline. Suppose it happens, then will the benefits of high growth rate ever trickle down to the people?
4. There is no doubt that the proposed suggestions will surely lead to higher prices and higher taxes, and will be instrumental to a large extent in diluting the process of the ‘trickle-down’ effect, which is basic to all the equity issues in the country.
5. One may also ask another basic question: If the Government has so far failed to impose any kind of public discipline in the country, how will it impose fiscal discipline and that too within the given time-frame?
6. In terms of the recent statement of the International Monetary Organization (IMF) Asia is pulling far ahead for the rest from the deepest recession that started about a year back. Amongst the Asian countries, India and China are on the top. According to IMF the recovery has already started, and financial markets are healing. The basic reason for this upsurge, especially in the context of India, is the policy stimuli in terms of tax and interest rate concessions given to the industry and individuals to spur consumption and investment. But the basic fact is that IMF’s forecasts may not be right because of the various queries that have been raised above. Unless the Government goes into the depth of the matter, nothing mush should be expected.