Debt-to-GDP spiralling out of control

As expected, there were not many surprises in the Budget for 2018-19 presented by Finance Minister Arun Jaitly, except a greater allocation to infrastructure by about a lakh of crore, extension of reduced tax rate of 25 per cent introduced in the last year’s Budget to Micro, Small and Medium Enterprises (MSMEs) having turnover up to Rs 250 crore, boost to digital economy through support for Artificial Intelligence, Digital manufacturing, big data analytics and Internet of Things.

The FM has also attempted to deftly disguise the increase of cess from 3 to 4 per cent on individuals and corporates to yield a whopping amount of Rs 11,000 crore. Whereas, it is publicised much that about 2.5 crore salaried class (including pensioners) are going to be benefited by virtue of allowing a standard deduction of Rs 40,000 in place of the present exemption allowed for transport allowance and reimbursement of medical expenses. Even if there is the revenue loss of Rs 8,000 crore, there is a net gain of Rs 3,000 crore owing to the hike of cess from 3 to 4 per cent.

Quite surprisingly, there was an unusual allocation of 17,000 crore to the 160-km network of suburban rail for Bangalore. This, perhaps, is keeping in line with the 2018 State Election. Leaving apart, let us go into detail in respect of the avowed and much publisised objective of ‘Fiscal Consolidation and Discipline.’

As per the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, both the Central and the State governments are required to adhere to the Fiscal discipline by limiting their fiscal deficit to 3 per cent of GDP by March 2008, with a gradual phasing out of the same at a minimum rate of 0.3 per cent annually and reach the objective of wiping out completely. If this norm had been followed scrupulously, fiscal deficit should have become zero by March 2018. But it did not happen.

We are hovering the same percentage of target even after a decade. Going into retrospect, the Fiscal deficit which stood at 6 per cent in 2008-09, sharply rose to 6.5 per cent, the very next year. Though there had been significant gains since then, which it came down to 3.2 per cent, neither the present government nor its predecessor could eliminate the same as targeted.

As per the Budget details of the Finance Minister, the fiscal deficit was projected at Rs 5,46,531 crore in 2017-18. The same has shot up to Rs 5,94,849 crore in revised estimates, an increase by 8.84 per cent for the Budgeted estimates. A slippage by 0.3 percentage points. Ignoring this experience, the FM has been projecting that in 2018-19, the deficit would work out to Rs 6,24,276 crore, or 3.3 per cent of GDP.

If the story of the yester years is going to be repeated, the actual deficit may end up at 3.6 or 3.7 per cent. Thus, it is naive to hope that there will be windfall on account of containing fiscal deficit. Moreover, the deficits of economy are required to be viewed in the larger context of the Centre and the States. While the Centre has projected the fiscal deficit to be about 6.24 lakh crore, the states have already reached this threshold to make a formal welcome to the former.

As per the reports of the Reserve Bank of India (Handbook of Statistics on States 2016-17), the fiscal deficits of states had got skyrocketed to Rs 4.93 lakh crore in 2016-17 from just Rs 18,790 crore in fiscal 1990-91, a quantum jump by any standard. The two BJP-ruled states now had topped the list of all states at Rs 64,230 crore in 2015-16 (projected to come down to Rs 49,960 crore in 2016-17) in case of Uttar Pradesh and at Rs 67,350 crore in 2015-16 for Rajasthan.

This is expected to come down to Rs 40,530 crore in 2016-17. Going by the past experience, it is highly difficult to accept the claim of the states that they would be more disciplined. While this being the situation, states like Telangana and Andhra Pradesh are representing to the Centre that the threshold limit of 3 per cent be increased to 3.5 per cent of GDP at least.

Turning our attention to the revenue deficit, the target had been to wipe it out from the projected level of 2.5 per cent in 2002-03, to zero level by 2007-08, reducing it at the rate of 0.5 per cent annually. This also had not come to be true. By the time of the targeted year (i.e., 2007-08), it was hovering around 4.5 per cent of GDP. Though the same had decelerated to 2.1 per cent in 2016-17, it accelerated again to 2.6 per cent in 2017-18.

As a matter of fact, it was projected to be around only 1.9 per cent in the Budget of 2017-18, but it had to be placed at 2.6 per cent in the revised estimates. The seriousness of the situation would get adequately reflected, if we go into the absolutes.

The actuals in 2016-17 stood at Rs 3.16 lakh crore. Basing on this, Budget of 2017-18 projected it to be Rs 3.21 lakh crore. But the actual RD has shot up by a whopping figure of 1.18 lakh crore; Quite unbelievable. While this being the reality, do we have the courage to discipline ourselves on fiscal front is the question.

Going again by the report of the Reserve Bank of India, the revenue deficits of the states stood at Rs 45,700crore in 2015-16. This was projected to become zero and they expected that there would be a surplus of Rs 20,805 crore in 2016-17. But the fact remained that it had turned out to be the deficit of Rs 31,100 crore. This is our budgeting and budget acumen.

It is also a fact that, no state government is in a position to adhere to the fiscal discipline and are living beyond their means with a wide variety of ‘freebies,’ including rice subsidies, farm loan waivers, special charity camps, etc. The resulting consequence of this gross indiscipline has been the mounting debt burden on both the Centre and the States.

Theoretically, the fiscal deficit is to be financed either from internal debt or through external debt. In our practice of public finance, the role of external debt, being reduced year after year, is dependent completely on internal debt, consisting of market borrowings, small savings, provident Funds, etc.

For the Budget year 2018-19, the projected deficit of Rs 6.24 lakh crore is sought to be filled through market borrowings by 4.07 lakh crore and 0.75 lakh crore by small savings. It is a common sense proposition that when income is less than the expenditure, there is no other way except to beg, borrow or steel. But the implication of this perennial practice is that the Public Debt is growing by alarming proportion.

As per one International website (countryeconomy.com), India’s National Debt has gone up by $ 1,22,427 million since 2015 to $ 15,75,468 million: which accounts for about 69.58 percent of GDP of the country. On this estimate, the per capita debt is worked to $1,190 for every Indian. Economists suggest that this is required to be cut to at least 50 percent of the GDP.

Compared to the centre, the states position has emerged to be too worse. In a single case of Maharashtra, the figures are that its debt burden is about Rs 3.71 laks crore in 2016-17, up by about 26 percent in just about two years; paying an interest of about Rs 28,830 crore annually. In the case of the centre too, the outgo on account of interest was projected at Rs 5.76 lakh crore or 23.6 percent of the total Budgeted expenditure.

Next in the order, is only the Defence at Rs 2.83 lakh crore (or 11.6 percent of the Budget). Interest commitments appear to be more pronounced than the security of the nation. Therefore, by no means, the Government of India need to be complacent on the issue of establishing fiscal discipline in the country and not to push the deadline further and further, defeating the very purpose passing the FRBM legislation. (Writer is Former Vice-Chancellor, Acharya Nagarjuna University, and presently Director SEA Group of Institutions,
Bengaluru)

By Prof K V Viyyannarao