Saturday, March 01, 2008

What is the correct fiscal deficit figure?

The budget for 2008-09 shows a fiscal deficit to GDP ratio of 2.5%. Critics scoff at this figure. They say it does not include three things: the proposed loan waiver of Rs 60,000 crore, the Sixth Pay Commission report and off-budget subsidies.

The details of the loan waiver, we are told, will be revealed later. The key issue is what proportion of the burden will be borne by the exchequer and what proportion by banks. The costs of the exchequer, it is reasonable to suppose, will be borne through the issue of bonds. That too in instalments. Assume that Rs 40,000 crore is the burden on government and this is borne over three years. The annual impact of the fisc would be insignificant- 0.3% of GDP.

The Sixth Pay Commission is estimated to cost around 0.5%of GDP annually. Arrears may be staggered over a few years.

The FM claims that,for the first time, there is transparency in respect of off-balance sheet subsidies. These are shown in 'budget at a glance' at around 0.35% of GDP. The PM's Economic Advisory Council estimates these at 2% of GDP. Queried on this point by Business Standard, the FM retorted that the question should be put to the EAC!

Where lies the truth? Well, the FM js technically correct in that the figures shown in the budget show the value of bonds issued thus far. But the bonds issued so far do not cover the dues payable to fertiliser and oil companies in full- this figure is the correct figure for contingent liabilities of the government of India because the government is committed to paying these.

If the disclosure in the budget is what is meant by transparency, we can do without it.

Incidentally, going by the above assumptions, the adjusted fiscal deficit would be closer to 5.5% of GDP if you include the value of subsidies payable in full.


The Happionaire™ Blog said...

It was very interesting reading about your interpretations Prof. Mohan.

We would need to wait and watch about the funding. I have a feeling it is mostly going to be with bonds.

Yogesh Chabria

KVSSNrao said...

On the programs side, I feel the budget has not paid proper attention to the public transport systems, Village industries, public health care facilities etc.
When the government has adequate tax revenue these areas should have been taken care of.

It is important to critically look at prgrams initiated and ignored by government.

The Happionaire™ Blog said...

I agree. One of the major things that needs to be looked at is public transport. Personally I feel if we bring in competition and open p the public transport sector, we can see better results.

Imagine having the choice to choose between a bus service run by TATAs,Reliance or the government.