Profligate Spending, Poor Returns
Indian government deficits, both fiscal and current
account, are reported to be in decline via accepted norms of accounting compartmentalisation. They are
simultaneously and otherwise estimated to be at multiples of what the official
reports would suggest.
The Indian juggernaut is remarkably profligate in
its spending. This is obvious to the casual observer, who has to remind himself
that this is an ‘emerging economy’ and not some hugely rich kingdom with
separate kings at every lamppost.
The government spending we see is mostly and
audaciously self-serving in terms of where and how it is applied. The ruling sarkari
classes: bureaucracy and politicians alike, are united in this. So, there is
little left over in any budget or ad hoc pool for growth and development
aimed at the people, either on a revenue earned or borrowed basis. But new
taxes and cesses are ever popular, in place of any kind of government belt-tightening
or efficient use of capital.
Most of what the government borrows, goes, in fact,
to pay off other borrowing already in place! Where does the voter figure in all
this? Certainly not very high on any real list of priorities, though the
people, particularly the poor, are often invoked as an alibi.
Still, the sharp oil price decline, now at below $37
a barrel down from over $110, has helped dramatically to better the comparative
figures on deficits, and inflation too.
In an Orwellian sense, the deficits have indeed
declined during the nearly two years of the Modi government, but only against itself,
as selectively defined. But, to what, beyond the declining price of oil, and
thereby the smaller petroleum import bill, can we attribute the betterment to?
What we call the total fiscal and current account
deficits, doesn’t count up a lot of outstanding borrowed expenditure; much of
it knowing future bad debt, that is sitting under various other heads, both at
the centre and the states, and in the books of state owned utilities and the
like. These together, are said to be nothing under 10 -15% of GDP, at a conservative
estimate.
But reports that come up with this ‘actual deficits
are much higher than realised’ thesis, laden with statistics, graphs, charts,
and difficult economic theory, as they tend to be, are not appreciated by any
government of the day. They don’t want to think about it, because much deficit
spending is either for its own ben efit, or vote seeking and populist in nature
- free electricity, free other things, known unprofitable ventures; and they
don’t want the exposure. Just imagine so many overweight emperors with no face
saving clothes.
Besides, reports on national deficit financing etc.
tend not to be understood outside of accounting, rating/analyst and economist
circles, and therefore are largely given the miss by the mass media as well.
The readership statistics on editorials and op-eds
may be rising as a tool to self-improvement, but as a percentage of total
readers of media output, tend to be in the single digits, here and indeed
worldwide.
But when it comes to deficits, the most powerful
country in the world, the United States, counts its national debt in ever
ballooning but unfazed trillions, supported by little beyond its credibility by
way of collateral.
Its allies across the pond, including Germany and
France, are not exactly debt -lite either. In fact the entire borrow-and-spend
West is in recession, with several of the smaller components of the EU quite
bankrupt today, because of this great way to get ahead, in vogue ever since the
eighties.
Governor Raghuram Rajan of the RBI, first became
world famous while working at the IMF, for predicting, most unpopularly, that
the party was going to end in tears, some years before 2008 happened.
Meanwhile, India is said to be growing at 7.5% in
terms of GDP after the method of calculation was changed. According to the old
method, again not amplified on much by anybody, we are still languishing at
some 5.2%. And the real rate of growth after inflation depends on the sleight
of hand you best fancy.
In any event, though 7.5% is meant to make India the
fastest growing major economy in the world today, better than China, growing at
slightly less, with its $ 12 billion economy. But the real point is China is
over-built and played out in terms of its export model, and India may be just
getting started, at its traditionally
elephantine pace, or is it that of the Vaishnavite tortoise?
India is, in
any case, operating from a low base of approximately $ 2 trillion. But many
serious commentators have said that it certainly does not feel as if the
economy is growing at over 7%. Industry and services, agriculture and incomes,
all seem to be stagnating instead. Life is tough. Making ends meet is not
getting easier. Where are the new jobs? One quarter of youngsters under 25 are
said to be looking for jobs. The stock and property markets are going nowhere.
The official growth rates must be correct, if the
statistics say so, and international rating agencies such as Moody’s and Fitch
accept it. But it is a wonder why they do accept it. Probably because they
conform to the same international principles that has the world in a lot of economic
trouble presently.
But the suspicion in the common mind is that maybe
the statistics are convoluted, and are missing the real state of play. Will all
of this, domestically and internationally blow up into another major crash,
worse than the first, despite the pump priming of billions over years or maybe
because of it? Many economists say yes. The world as such however, is in
denial.
In India, most state revenues are far short of
expenditure, as are the expenses versus income of the central government. Besides
there are historical debts racked up in previous years, sometimes by previous
governments, still largely outstanding. These eat away at current state
allocations from the centre, as well as whatever revenues it generates within
the state. Interest piles up on unpaid interest, compounding its way towards a
ruinous, unaffordable, write- off eventually, time and again.
Economic packages are demanded and granted, and all
the while the deficit funding keeps ballooning. OROP and the 7th Pay
Commission under process, is going to cost the government a pretty penny, and
though the stimulus to the economy in many consuming hands is welcome, even the
official deficit targets have had to be
pushed back to future years.
Productivity and return on capital, the drivers of
healthy economic activity, are however, largely missing in action, even in the
private sector, and certainly in the government, and the public sectors it
runs.
It is no wonder that Raghuram
Rajan, a fiscal conservative, has been harping on the bad debt situation
of the PSU banks. It is not his job, but if he was the finance minister and
wasn’t a politician in that role, he’d
have a great deal more to say about the parlous state of the government’s
finances and its massive public debt spiralling ever higher as well.
Rajan wants the bankruptcy law as soon as possible
to clean up the books. But the government, after considering passing it as a
money bill in the Winter Session’s last days, has pushed it down the pike to a
joint parliamentary committee to consider. It won’t surface before the budget
session in February 2016 at a minimum now.
But the moot question is, does this government want
to see a large number of bankruptcies piling up under its watch? Cleaning up
the burden of debt in the banks may be important to the professionally manned
RBI, but can be very embarrassing and politically damaging to the Modi government.
Which Pandora’s Box should be opened voluntarily?
Shouldn’t they all stay firmly closed?
For: Swarajyamag
(1,305 words)
December 24th, 2015
Gautam Mukherjee
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