International BusinessA K Bhattacharya: No escape from a 'fiscal holiday'
A K Bhattacharya / New Delhi June 17, 2009, 0:28 IST
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Fiscal deficit as a concept had not entered the government’s Budgetary lexicon when Finance Minister Pranab Mukherjee presented his last regular Budget in February 1984. Those were the days, when the government would merrily include borrowings in its overall receipts and finance ministers would talk about only a Budget deficit figure in their speeches, without of course any reference to the gross domestic product or any other benchmark.
Thus, the Budget deficit figures would refer only to the Reserve Bank of India’s net credit to the government and, therefore, mask the extent to which the government sought recourse to other borrowings to reduce the gap between its total expenditure and receipts. The only way to gauge the significance of that absolute Budget deficit figure was to compare that with what the Budget deficit was a year ago.
The concept of fiscal deficit entered the government’s Budget documents only in 1991-92, the first Budget presented by Manmohan Singh as finance minister. Another change took place in 1997-98, when Palaniappan Chidambaram presented his second Budget under the United Front government. That was the year when Mr Chidambaram phased out the concept of Budget deficits as the government discontinued the practice of getting RBI credit through ad hoc treasury bills.
It is, therefore, ironical that as Pranab Mukherjee gets ready to present his first Budget after a gap of 25 years, he has to contend with a demand for reviving a practice that the United Front government gave up 12 years ago, after receiving sound advice from an expert committee. Industry leaders have urged the finance minister to monetise a part of the deficit through loans from the RBI. They have argued that by monetising a part of the deficit, the government can reduce its borrowing from the market and limit the upward pressure on interest rates.
Is industry serious about its demand? Yes, it is. It fears the adverse impact of the government borrowing of Rs 360,000 crore during the current year on interest rates. Why not, then, revive direct government borrowing from the RBI just for a year or two? Once the economy picks up and the credit flow improves with no upward pressure on interest rates, the finance minister could once again decide to phase out direct borrowing from the RBI. Economists have criticised this demand unambiguously. However, Mr Mukherjee may wonder whether there is some merit in accepting the industry suggestion if it allows him to spend a little more money on his favourite social sector schemes.
On the question of fiscal deficit alone, Mr Mukherjee may like to follow a slightly unconventional path. The revised estimate of fiscal deficit for 2008-09 has already crossed 6 per cent of GDP. In his Interim Budget presented on February 16, Mr Mukherjee had projected a fiscal deficit target of 5.5 per cent. If the excise and service tax cuts are continued without any further changes for the full financial year, the fiscal deficit would further increase by about a percentage point of GDP, taking the deficit figure to 6.5 per cent. If he plans for higher expenditure on infrastructure and social sector schemes, in keeping with the government’s focus on aam aadmi, Mr Mukherjee may have to contend with some further slippage in fiscal deficit, even after taking into account the proceeds from disinvestment of government equity in public sector undertakings.
Mr Mukherjee may also wonder if it is time for him to declare 2009-10 a ‘deficit holiday’ year. If governments across the globe are busy announcing fiscal stimulus measures, paying no heed to deficit targets, why shouldn’t India also follow a similar path? Mr Mukherjee may have a simple way out of this dilemma. The 13th Finance Commission is likely to submit its report by September this year. Among its tasks is to suggest a new roadmap for the kind of fiscal responsibility rules and deficit targets that should be in place after March 2010. Mr Mukherjee may well decide to take a break from the discipline of adhering to deficit targets mandated under law for the current year and announce to Parliament that he would return to the path of fiscal rectitude from the next financial year as advised by the 13th Finance Commission. One can only hope that this deviation will only be a temporary affair.