Fiscal deficit in Indian Budget

The latest is about the 'Fiscal Policy Strategy Statement', presented by Chidambaram along with other budget papers, which appears to be a continuation of a structure initiated in 2005 Ever since the Whig Prime Minister Robert Walpole referred to the budget opening the leather bag in British Parliament in 1733, the term became popular throughout the world about an annual financial exercise. The first budget in our country was presented for seven and half months in November 1947. The Constitution has made special provisions for presentation of the annual financial statement (budget) in the Parliament. It has undergone far-reaching changes in the budget speech of Finance Minister starting with a few pages and ending with volumes in print, comprising different aspects of revenue and expenditure and other matters. The latest is about the 'Fiscal Policy Strategy Statement', presented by Chidambaram along with other budget papers, appears to be a continuation of a new structure initiated in 2005. Immediately after Independence, there was hardly any occasion to look at fiscal deficit except the overall budget deficit of excess expenditure over revenue. The federal structure of the country and the separation of functions between the Union and the States along with division of resources are clearly laid down in the Constitution. Of course, they are increasingly becoming contentious with growing aspirations of provincial groups and parties. In fact, the liberalization of the economy has further strengthened these divisions with regional satraps wielding more power.

However, the Central leadership and the Union governments have been trying to resolve some of these issues within the existing institutional structures of fiscal federalism. But a new regime of fiscal prudence with measurable indicators was brought into the jargon of our budgets from 1991. It is noted that, " a more complete measure of macroeconomic imbalance used internationally is the concept of gross fiscal deficit which reckons the total resource gap in terms of excess of total Government expenditure over revenue receipts and grants. This concept fully reflects the indebtedness of the Government". This shows the philosophy behind the concept and the conditions of the fiscal profligacy of the period resulting in alleged crisis in Balance of Payments. Expertise in Public Finance is not a pre-condition for budget-making as the trajectory of a budget is decided prior to its presentation. It seems three important quantitative indicators now dominate the field: The Rating agencies, SENSEX and the Fiscal deficit. A new piece of legislation was also brought in 2003 known as FRBM and amended in 2012. Some parliamentarians who talk about the defects or merits of the budgets appear to be unfamiliar with the constitutional provisions in Articles 107 to 117. Are they not infringed? For instance, 6 important policy modifications were made to give primacy of Fiscal Deficit to arrive at 5 percent of GDP in 1991. They are: Reduction in the fertilizer subsidy by increasing the average price by 30 percent; abolition of cash compensatory support for exports; abolition of subsidy on sugar through PDS; offering 20 percent Government equity in PSEs to public; a 20 per cent increase in the prices of motor spirit and LPG; and adjustment of tax rates to yield net revenue of Rs 2500 crores. The approach of the policymakers in Delhi appears to be that of a banker and not necessarily that of an economist. A banker looks at the creditworthiness of the loanee (borrower) and not his needs. This is all right for an individual, but can we treat a country like this? However, the World Bank and the IMF institutions look at the borrowing country like a customer and prescribe prudential norms. The concept of Fiscal deficit is part of that strategy. Fiscal deficit is total expenditure of the government (revenue and capital) minus revenue receipts minus loans and other capital receipts, expressed as a proportion of GDP. It was around 7 percent before 1991 and was brought to 5.4 percent in 1995-96 and further reduced to 4.4 in 2004-5. It is again moved to 5.7 percent in 2011-12 and is being regulated to get 4.8 percent in the current budget. It is noted by the FPSS that "the fiscal policy of 2013-14 has been calibrated with twofold objectives: First to aid the economy in growth revival; and, second, to bring down the deficit from 2012-13 level so as to leave space for private sector credit as the investment cycle picks up." There are two other deficits: The revenue deficit consisting of revenue expenditure minus revenue receipts; and the primary deficit is fiscal deficit minus interest payments. The two deficits, along with capital formation, are sufficient to look at the financial health of a domestic economy. No one argues for free ride or advice to sell/mortgage family silver to buy/import Kurkure. But, subsidies have been evolved as sinews of political war.We have calculated the gross capital formation of the country as per cent of GDP was 10.89 percent in 1950-51; it reached 17.24 percent in 1974-75 and around 20 percent by 1980-81. The percentage has arrived at 26.0 in 190-91 while the GDP growth was considered small. Strangely, the proportion in 2000-01 came to the pre-reform period at 24.36.The recent budget report projected it at 35.0 percent for 2012-13. Similarly, the tax-GDP ratio was the highest in 1989-90 with 14.2 percent and has not so far reached that level during the reform period as it stands at 10.4 percent.The policymakers tell us that the way to reduce fiscal deficit is through reduction in Government expenditure on subsidies and social sectors as they consider them unproductive. It is only a half truth. There may be leakages in subsidies and inefficient administration of schemes, but, has the money gone down the drain? We do not know who the neo-rich, the share- holders of companies, etc, and for the rise in aggregate demand for the white goods. Yet, the fiscal deficit can be reduced without affecting the expenditure by broadening revenue. Fresh public resources are always found in knowledge society like 3G/4G or expansion of service sector and the tax, bourgeoning of capital market and the transactions tax etc. It has been more than two decades now that the State has given enough concessions to these sectors; it is now their turn to contribute to the development of the country. In this context, Chidambaram's budget seems to be a mixed bag. He has shown the way to get money but was not courageous enough to touch the super rich who are the beneficiaries of liberalization. The FM has reduced the tax on securities transactions, exemptions to Securitization Trusts and paid little attention on commodity markets. It is here the so-called black money goes in, and the Finance Minister has the moral and legal right to tackle them for the good of all. This would help reduce the fiscal deficit and ought to satisfy the fiscal fundamentalists.