Can't afford to let fisc run loose

The overall growth of real GDP in 2011-12 is expected to be around 6.5-7.0 per cent with a downward bias. Fiscal economists of repute argue that this is not the time for fiscal prudence and the imperative is for a fiscal stimulus in 2012-13.

The fiscal arithmetic in the current financial year has gone terribly wrong. As against the Centre's Budget Estimate for the Gross Fiscal Deficit (GFD) of 4.6 per cent of GDP for 2011-12, in the first nine months the budget deficit is already 92 per cent of the full year's deficit; the GFD for the full year could end up at over 6 per cent of GDP. Of course, there is always scope for clever financial engineering to camouflage the size of the fiscal deficit. As such, there are concerns about the quality of fiscal adjustment. There could be economy in transparency of disclosures. There appear to be desperate efforts to somehow reduce the GFD by selling the family silver. The sale of family silver would make sense only if the liabilities of the government are reduced.

There is brave talk on strong measures of reforms, with emphasis on the infrastructure and labour-intensive industries which would generate employment. In the absence of fiscal space for a stimulus, the chorus advocates that the Reserve Bank of India (RBI) should refrain from “monetarist” policies. There is endemic confusion in the minds of the expansionists as they label any cautionary policy as being “monetarist”. Needless to say, this is a totally erroneous interpretation of “monetarist” policies. No “monetarist” would accept India's permissive monetary expansion as being consistent with a “monetarist” policy.

What is worrying is that economists of repute are talking about the need for an aphrodisiac to stimulate growth.

INSTITUTIONAL ARRANGEMENTS

The problems of the Indian fisc are not of recent origin. Way back in the 1980s, Reports of Finance Commissions as well as those by the Comptroller and Auditor General (CAG) had emphasised the need for reining in government borrowing. The government's approach has all along been that the government debt never has to be repaid as the gross borrowing requirement would be the net borrowing requirement plus the repayment. As such all that the government needs to do is to ensure that interest payments are met. This was a reasonable stance when the repayments were modest and there was a captive market for government securities. With the relaxation of reserve requirements and a market-driven government securities market, the assumption that there would be an assured market for government securities no longer holds.

It is unfortunate that the system of a Consolidated Sinking Fund (CSF) to redeem the government debt was scrapped in the context of widening fiscal deficits and as such no viable arrangements were instituted to redeem the government debt. The two Supplemental Agreements between RBI and government, of 1994 and 1997, attempted to contain RBI credit to government but these were subverted by RBI absorbing government paper in the secondary market. The Dr Y.V.Reddy-Dr E.A.S Sarma Group on the Fiscal Responsibility and Budget Management Act recommended that there should be an oversight body to ensure that the letter and spirit of the Act should be adhered to. This was rejected as the government wanted unfettered independence for its fiscal operations.

Admittedly, the government is subjected to Parliament approval. Such approval is a charade as the government presents to Parliament the Budget Estimates and the Revised Estimates along with the previous year's Actuals which are a fait accompli .

It is argued that the government should have unfettered freedom to meet manifold exigencies such as increased food, fertiliser and petroleum subsidies.

ABSOLUTE CEILINGS

As C.A.Yandle, the hardliner and venerated fiscal expert from New Zealand puts it, given the limit to the GFD, any increased fiscal expenditure should be matched by a corresponding reduction in other expenditure, or increased revenue. This is subject to the important proviso that the initial deficit is stable and sustainable — which is clearly not the case in India. Welfare programmes cannot be easily rolled back, and hence while undertaking such expenditures there must be enduring resources to fund these long-term expenditures.

There is a need for certain mandatory measures. First, the CSF should be revived. Second, there should be an absolute ceiling on government debt. Thirdly, there should be a ceiling on RBI credit to government. While the RBI had prepared comprehensive schemes on all these three measures 15-20 years ago, the government rejected these proposals as it felt that the government needs unfettered freedom on the GFD. In the light of the poor track record of the government, these schemes should be revisited.

Lastly, it has been proved beyond doubt that fiat money has been a failure the world over and sooner or later a Gold Standard type of system will have to be implemented. In the absence of such a hardliner approach, the world is condemned to be afflicted by the scourge of an unfettered fisc.

(The author is an economist. >blfeedback@thehindu.co.in )

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