UPA slips on the fiscal peel

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The path to hell, said St Francis de Sales, is paved with good intentions. When the UPA came to power four years ago, the then Finance Minister, P. Chidamabaram, had made achieving the FRBM target of a fiscal deficit of 3 per cent, a non-negotiable target.

Today, no one believes that it will be less than 9 per cent. Five years from now, when the record of this government is judged, it is only this that will remain. The excuses will hold no water. So what happened to the UPA Government’s resolve, when it assumed office in June 2004, to stick to the fiscal rules under the FRBM Act 2003?

In fact, it was at the initiative of P. Chidambaram that the notification of the FRBM rules was expedited as soon as he assumed office at North Block in June 2004. The intent was to send a clear signal to the international community about the fiscal prudence and reform intentions of the UPA coalition government.

FRBM targets

However, the “pause button” on adherence to the FRBM targets was pressed for Budget 2005-06 itself, a mere eight months after the FRBM rules were notified! While the FRBM targets of 3 per cent for fiscal deficit and elimination of revenue deficit was initially slated to be achieved for 2008, the goalposts were shifted to fiscal year ended March 2009.

Now, even the 2009 deadline has been given a go-by. But this time round the blame for this has been placed entirely at the door of the global financial meltdown.

The fiscal strategy went massively awry in the last one year or so. But it would be wrong to blame the global financial meltdown alone. Subsidies and oil bonds had made a nonsense of the FRBM target as early as 2006. The stimulus packages have only been the last nail in the fiscal coffin. The Government has this fiscal spent additional Rs 1,50,000 crore in cash to stimulate the economy and protect its growth momentum.

Critics say the Government did not plan its finances well during the good times, especially 2004-2007. The tax bounty in recent years could have been used wisely by saving some for the bad times.

Instead of betting on growth and continued tax buoyancy, the Government splurged on new policies and schemes that put further stress on the fiscal – the near Rs 65,000 crore farm debt waiver and pay hike for government employees, to name a few.

Fiscal consolidation

Fiscal slippage outlined in the interim budget for 2009-10 and the consequent Standard & Poor’s (S&P) revision in the outlook on long-term sovereign credit rating has compelled foreign investors to take caution. The outlook was revised to “negative” from “stable” by S&P, an international credit rating agency.

The recent slide in rupee is an indication of the fall in investor confidence. The rupee recently hit a record low against the US dollar (Rs 52 to a US dollar) as foreign funds rushed out of India, placing downward pressure on the rupee.

While revising the outlook on India’s long-term sovereign credit rating, S&P highlighted the weak fiscal profile of India and called into question the country’s commitment to fiscal consolidation. The core concern now is unsustainable fiscal position. S&P expects India’s total fiscal deficit, including the off-budget liabilities, as a percentage of gross domestic product (GDP), to touch 11.4 per cent for the fiscal year ended March 2009, from 5.7 per cent in the previous fiscal year. It expects a near similar position in fiscal 2009-10 as well. Economists point out that the Centre’s fiscal deficit in 2008-09 is estimated to touch 6 per cent and the off-budget liabilities will account for 1.8 per cent of GDP.

Add to this States’ fiscal deficit of 3.5 per cent, the total fiscal deficit would comfortably exceed 11 per cent this fiscal. The Finance Minister, Pranab Mukherjee, said in his recent interim budget speech: “We will return to FRBM targets once the economy is restored to its recent trend growth path”.

The recent global meltdown and its ramifications on the Indian economy have necessitated counter-cyclical fiscal measures, enhancing the expenditure outflow and leading towards temporary deviation from FRBM targets, says macro-economic framework statement.

Subsidy bill

Part of the fiscal slippage in 2008-09 can be attributed to the Government’s resolve to insulate the consumer from the unprecedented rise in the cost of petroleum products and fertiliser.

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The subsidy bill on food, fuel and fertilisers, including Rs 95,942 crore of special securities, has gone up from Rs 66,537 crore in BE 2008-09 to Rs 2,18,294 crore in RE 2008-09, amounting to about 4 per cent of GDP. While total subsidy provision for fertilisers stood at Rs 95,849 crore (including special securities of Rs 20,000 crore), it was Rs 78,818 crore (including bonds for Rs 75,942 crore) for petroleum products and Rs 43,627 crore for wheat and rice.

The Centre has to a great extent tackled the unprecedented rise in subsidy bill through the issuance of special securities, which are essentially off-budget liabilities. But this is only sweeping the problem under the carpet. But to make it all official, the latest fiscal policy strategy statement has put it bluntly –the fiscal consolidation process has to be put on hold temporarily and it will be back on track once there is an improvement in economic conditions.

Will it? Only the naïve would bet on it.

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