Monday, March 19, 2012

Goodbye fiscal consolidation but is it a big deal?

To me, one of the most striking figures in the latest Budget is in in the medium term fiscal policy framework statement that accompanies the Budget. It shows the target for the fiscal deficit for 2014-15 at 3.9% compared with the Thirteenth Finance Commission target of 3%, which is the level prescribed by the FRBM Act. This means that the government will not meet the FRBM target even by 2014-15! And it will exceed the target by a full 100 basis points.

The debate on whether the target for 5.1% for 2012-12 is realisable is secondary. My guess is that it this is unlikely even if the revenue targets are met unless the Food Security Act is not going to happen in a hurry. I say this because no explicit provision has been made for the Act. We have to assume that the when the FM says that subsidies will be capped at under 2%, he is talking of the present subsidies, not new ones.

Since fiscal consolidation will not happen, we cannot expect inflation to come down below the RBI's 5% comfort zone of 5% in the near future. In other words, we are stuck with both high levels of fiscal deficit and inflation.

Is this a big deal? Not in terms of debt sustainability. The Finance Commission target of 45% for the centre's debt to GDP ratio by 2014-15 will be almost met in 2012-13. One of the big dangers with rising fiscal deficits is that it may lead to the government not being able to borrow any further. This is clearly not a danger for us.

Will it hurt growth? Well, I suppose so. But this does not mean that growth will not accelerate. Savings and investment will keep rising thanks to private saving, so growth will inch forward. It's just that we won't get back to 9% growth as quickly we might have otherwise.

The optimistic view before the sub-prime crisis was that, having touched 9% growth, we must aim for 10% by the end of the Five year Plan starting 2012-13. Now, it appears that we will move from 7% to 8-9% in the same time horizon. That doesn't strike me as a big disaster. So what are all the media pundits ranting about?


Anonymous said...


chandramouli said...

1)The govt will be able to achieve the 19.5% increase in Gross Tax Collections in 2012-13 over the revised current year estimate with the added levies, projected growth rate of 7.6% at a projected inflation rate of 6.5%
2) The problem is in the expenditure side. A meagre 13% increase? The revised estimate of major subsidies is Rs. 2.09 L cr in the current year, while the budget projects Rs. 1.80LC for next year. This is very low as the increase between F.Y. ending 2011 & F.Y. ending 2012 alone is about Rs. 44KC (27%). If the same is applied to next year the subsidies will be over Rs. 2.50 LC. This means FM is planning to cut subsidies of fertilisers and petroleum products to maintain his budget. He has not provided anything for food security bill, which is in parliament and will take several months before being cleared.
3) In this background inflation of 6.5% does not fit. WPI is expected to be 7% in march and 6.5% in April. But with the increase in excise and service tax by 2% there will be an all round price increase. As pointed out above with subsidies going down, petrol and diesel prices going up, it is going to push up transportation and travel costs. Hence projected inflation of 6.5% is unrealistic.
4) In short the budget does not tally. In this scenario it appears we will fall short of the targeted growth rate of even 7.6%.

Anonymous said...

I agree with Professor. The 14-15 picture as extrapolated is not a portent after all, particularly in a scenario when Eurozone & others are already suffering the omen. But the picture is less than optimistic, as was potrayed by UPA during initial years of its second term. The problem is relatively competing figures of our peers BRC. The fear is will that 'I' from the BRIC sustain?

And 14-15 scenario is plausible provided, the existing projections are met. Now here there is a surmise, because UPA wasn't able to achieve its projections made in the past and we're today living with evident gap of Fiscal & Revenue Deficit. What is this utopia is not accomplished come in 2014-15? The regression endorses this hunch.

And what on front of Black Money, DTC, GST, tax on populace etc. These things may or may not have an evident impact on macro economic barometers, but they definitely hurt the sentiments of media and populace at large.

To sum up - What was promised was not accomplished, so whatever is promised today, will that be accomplished? And what if it won't be? What after 2014-15?

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Anonymous said...

It may not be a big deal. But, why shouldn't we aim higher and aim for fiscal consolidation? Why sow seeds of destruction? Brazil has become an investment grade country over the last decade. Why can't we aim to do the same? And, are we getting the same returns that we should given the fiscal deficit numbers? In other words, the real question is: what is the point of the fiscal deficit if it only feed inefficient and grossly corrupt public systems?

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