Perched on a cliff – now taking a step forward!
#AditJain
#AditJain
At our CFO Roundtable in Jodhpur, Vivek Aggarwal of CIBIL raised a
pertinent point on the issue of Government finances. He correctly observed that
Government expenditure is presented as a percentage of Gross Domestic Product,
as are the various measures of deficits. He proposed that we undertake an
exercise, if only to present a more realistic perspective, using the
methodology adopted by commercial enterprises – simply put, that we look at these
metrics as a percentage of revenue.
This paper will provide some data along these lines but perhaps more
importantly, raise concerns that the current state of fiscal affairs has
perched India’s economy precariously. Frankly, it could go either way, and a
disaster might not be far.
In 2006-07, tax and other revenue receipts amounted to Rs 4.3 tn
while total expenses were Rs 5.8 tn, implying a fiscal deficit of Rs 1.4 tn.
When measured against GDP, the deficit amounted to 3.3%[1].
From conventional benchmarks, this would appear to be an acceptable figure.
However, when measured against revenue, the deficit was 32%. This was funded
largely by Government borrowings of Rs 1.1 tn (other capital receipts like loan
recoveries and fresh deposits in Government saving schemes, contributed the
balance). Effectively therefore, the Government over-spent its income by a
third and financed one fifth of its expenditure through borrowings. Over a
period of five years, this situation changed drastically – for the worse.
In 2011-12, Government revenue stood at Rs 7.7 tn while expenses
were Rs 13.2 tn. This amounted to a shortfall of Rs 5.2 tn which again had to
be funded largely by borrowings (Rs 4.4 tn). As a percentage of GDP, the fiscal
deficit was 5.9% but as a percentage of revenue, it was 68%. Effectively
therefore, the Government now borrows almost two thirds of what it earns and one third of what it spends.
The Treasury assumes that tax receipts will continue to rise as the
economy expands. Therefore, over time and through prudent management of costs,
it may be possible to reduce the income-expenditure gap as a proportion of GDP.
But the reality is that a large chunk of Government expenditure comprises of
committed payments – for instance, interest payments at Rs 2.8 tn, defence
spending at Rs 1.8 tn and appallingly, subsidies at Rs 2.2 tn. None of these
can be tinkered with in the context of India’s political structure. Additionally,
the welfare programmes instituted over the past few years will entail spending
commitments to service the NREGS, oil and fertiliser subsidies and now, the
food subsidy bill which will cost Rs 1.5 tn per annum. This alone is three
times the NREGS expenditure.
The total liability of the Union of India, which encompasses
sovereign debt, pensions and savings liabilities, stands at Rs 43 tn, half the
country’s GDP. Over the past few years, this has increased by Rs 4 tn or
thereabouts every year, largely matching the fiscal deficit. Servicing this
debt entails an annual outgo of Rs 2.8 tn, more than half the deficit itself.
Basically, the Government of India spends ~70% more than it earns, and half of
that is simply to repay interest commitments on past borrowings. It rarely
repays principals and simply borrows more to roll over past loans when they
come up for renewal. Even from generous benchmarks, this situation can only be
described as an internal debt trap.
Governments manage to chug along when economic growth is high and
tax revenues are buoyant – fiscal indicators measured as percentages of GDP can
then be made to look good. But in the wake of a slowing economy and
consequently falling revenues, this logic unravels and ‘committed expenditures’
begin to hurt. As the figures demonstrate, the present fiscal situation borders
on being calamitous.
Euro crises and global financial markets aside, the fact is that our
national finances have been badly managed. Even if the global economy were to
recover, Indian policy makers would have a lot of hard thinking to do. The
capital flows that have dried up are not so much a reflection of global market
conditions as the Government pretends and is painstakingly trying to convince
those that would listen, as it is a reflection of a fall in investor
confidence. Investors understand that mismanaged budgets lead to price
instability, falling investment and eventually a decline in future growth. They
see no appetite within Government to undertake reforming measures that would
alleviate these factors and therefore, attract capital. They realise that with
the Government in dormancy, India is quickly losing the plot.
To make things worse, recent decisions by Ministries reek of
arrogance. The Vodafone tax case and the denial of Reliance’s exploration
expenditures previously agreed have frightened not only international companies
but created mistrust among foreign Governments. A country, which cannot be
trusted is hardly one that would generate interest to do business with. This is
starkly corroborated by India’s own business community, which is now actively
pursuing investment opportunities offshore, as there seems little faith left
that things will improve in a hurry on the domestic front.
To top it all, there is a high probability that Greece will exit the
Eurozone[2]
and the contagion, which will affect peripheral economies such as Ireland and
Portugal but even core ones such as Spain. The Euro authorities neither have a
plan nor the financial ammunition to prevent this crisis. The inter-linkages of
the global economic system will ensure that the ripple effects will impact
India – and its substantially weaker economy (when compared to 2008) no longer
has the resilience to withstand the shock.
Ultimately, most problems boil down to Government finances and there
is no choice but to address this on a war footing. India has a battle on its
hand – of an economic nature – and the situation has to be dealt with
accordingly. Anything less and we run the risk of a very serious slippage from
where recovery will not only be hard, but also painstakingly slow.
Comments
I see the problem here is democratic unprofessionalism. How many projects in India completes on time is the question. The expenses are ten times against the budgeted costs for most of the projects run by GOI or states and hence depicts.
Regards,
Vinod Bidwaik
http://vinodtbidwaik.blogspot.com