Higher growth can help lower deficit
(The views expressed in this column are the author’s own and do not represent those of Reuters)
India’s bloating budget deficit has been a matter of concern. It means more borrowing by the government which results in overcrowding of the debt market and consequently, a higher rate of interest for the private sector. It also raises the rate on borrowings from abroad due to the downgrading by rating agencies which is bound to follow.
Government expenditure has certainly been getting out of hand, more due to subsidies on food, fertiliser and petroleum products. In the absence of these subsidies, the budget deficit would have been less than 3 percent. But subsidies are politically sensitive and can at best be reduced only gradually. Even a 7 percent cut in subsidies on diesel last September forced a change in the UPA government. Most other expenditures have become sticky and cannot be reduced without comprehensive administrative reforms.
But then there is the other side to the budget deficit. If expenditure cannot be cut, it is possible to increase income. It is precisely in the years in which growth has been high that budget deficits have been low. But to enhance its populist image, the government allowed expenditure to rise faster, resulting in lower growth and higher deficit.
Growth was high for three years till 2008. It exceeded 9.5 percent in each of these three years and brought in a flood of tax revenue. Corporate tax revenue increased the fastest, making corporate tax the single largest source of revenue. It is often overlooked that it is in the interest of the government to ensure that the corporate sector is offered facilities to grow faster and generate more income.
Till 2008, the tax revenues of the central government increased an average of 21 percent per year while expenditure rose 16 percent. Consequently, the budget deficit was down to 2.5 percent in 2007-08. The average deficit was 3.3 percent when growth was 9.5 percent.
But growth faltered in subsequent years and the deficit jumped once again. Last year, GDP growth was 7 percent and industrial growth lower at 2.9 percent. Naturally, the corporate sector failed to generate adequate revenue for the government from taxation. In the last four years, tax revenues dropped from 11.9 to 10.2 percent of GDP.
The finance minister is only too aware of the need to foster growth. Apart from initiating reforms to attract FDI, he has been prodding the ministries to expeditiously clear projects and the Reserve Bank of India to reduce the interest rate.
There appears to be a bounce in the economy. But it takes time for growth to pick up. There is little chance that it will be high enough to generate revenues enough to reduce deficit significantly. A visible change is only possible only in 2013-14.