The Hindu Business Line : Borrowing gamble

Is the fiscal deficit unsustainable? It depends on which side of the 21st century one takes into account in judging the Government’s fiscal behaviour.

If one has to borrow Rs 45 in order to pay a bill of Rs 100, one must be seriously worried about the state of one’s finances. That is the predicament of the Government of India. With a projected borrowing of Rs 4,51,000 crore and a fiscal deficit equivalent to 6.8 per cent of the gross domestic product, it is no surprise that India has invited a warning from the international rating agency, Standard & Poor’s, that the sovereign credit rating could be lowered. The fiscal deficit level is unsustainable; that is what the S&P warning implies.

Whether it is really so depends on which side of the 21st century one takes into account in judging the Government’s fiscal behaviour. If one were to look at the record of the Indian economy prior to 2001 one could understand the credit rating agency’s concern at the persistent fiscal deficit. For decades, policymakers poured public money down the drain, all the while printing more money to finance non-Plan and Plan spending that left the economy flailing and panting, and yet making no progress. Then the five years of high growth showed how Governments, both at the Centre and in the States, long used to spending taxpayer money uselessly, could act fiscally responsibly. As a result of both the NDA and the first UPA Governments, the deficit narrowed to around 2 per cent on the back of growing direct tax revenues and falling public investments. That record of fiscal prudence has had to be overturned in this downturn, by the need to step in where the private sector did not tread, a need Governments across the world have taken to heart, abandoning fiscal rectitude for the moment. India’s 6.8 per cent deficit is just half of that in the UK and US, whose deficits are as structural as India’s is, not because of fertiliser and oil subsidies but because of their deep financial involvement in war and peace and in providing social security. The World Bank forecasts 6-7 per cent annual growth for India and China over the next two years, which would in turn pull up global growth to around 2 per cent by 2010. In the event, the fiscal deficit could prove not to be so worrisome.

Judging by the last five years therefore, the problem is not the fiscal deficit per se but the gamble it represents; if policymakers can ensure that their borrowed funds result in new investments, new jobs and new purchasing power and accelerated investments in an expanding cycle, their current ‘profligacy’ would have been worth the short-term risk.

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