Fiscal deficit to kick up growth
(The views expressed in this column are the author’s own and do not represent those of Reuters)
In the first quarter of 2012, the government will be over-crowding the financial market to mop up nearly a trillion rupees. It is forced to borrow mainly because the expected revenue did not come in while the expected expenditures had been met.
Last year, the government had spent 55.7 pct of the budgeted expenditure for the year in the first six months. This year, the expenditure was at about the same percentage but the fiscal deficit was 74 pct of the budgeted amount. That was because of the shortfall in receipts. The tax revenue collected in the first half of the year was only 45 pct of expected revenue.
There is anxiety about the bloated deficit. The RBI had repeatedly warned the excess fiscal deficit was pushing up inflation. Besides, the lack of fiscal prudence was infringing FRBM (Fiscal Responsibility and Budget Management) Act which has targeted fiscal deficit at 3 pct of GDP. That target is looking increasingly illusory.
The government can bring down the fiscal deficit only by cutting expenditure. Many of the revenue expenditures like interest payments, defence, etc., and some capital expenditures like loan repayment are committed and cannot be reduced. The only expenditures that can be brought under the axe are subsidies and investment.
A cut in subsidies, though desirable, is politically difficult particularly now because elections in five states will soon be held. On the contrary, subsidies are bound to increase with the introduction of the food security Bill which is already pending in Parliament.
Inevitably, if expenditures have to be cut at all they will have to be in respect of new investment. That happens most of the time resulting in cost and time over-runs. No wonder capital expenditure in the first half of 2011-12 was only 48 pct of the budgeted expenditure for the year while it was 55 pct of revenue expenditure.
Is a cut in capital expenditure necessary now in order to hold down the fiscal deficit?
No. Since the second quarter of this year, the economy has been sagging. Industrial production in October was down 5 pct though some improvement in November is likely. GDP growth in Q2 had dropped from 9 pct to 6.9 pct. Both were largely due to the increase in interest rates by the RBI with a view to bring down inflation. After 20 months, food inflation is now at a mere 0.4 pct.
In these conditions, a high fiscal deficit will not revive inflation but generate additional demand necessary to pull up the economy. Surely that would not be in conformity with FRBM. But in abnormal times, abnormal measures are required to get back to normalcy.
It is important, however, that the government should use the additional money raised from the market for capital expenditure and not revenue. That would accelerate growth, increase tax revenues and bring the budget towards balance once again.