Little option but to risk high fiscal deficit

Union Budget 2009-10 drew criticism from several quarters on Monday for risking an alarmingly high fiscal deficit, but a scrutiny of the government’s spending plans suggests there were few options otherwise.

From the 26/11 terror attacks in Mumbai to the global economic downturn and the verdict of the general elections, a host of factors have forced the finance minister to loosen the exchequer’s purse strings even as revenue collections remain sluggish.

The fiscal deficit — that is the gap between what it spends and what it earns — is projected to top Rs 400,000 crore, enough to feed 16 crore families, or two-thirds of the population living below poverty line, for an entire year.

The deficit figure for the current fiscal year is nearly Rs 70,000 crore more than last year’s actual estimates. About half of this spike, or Rs 33,000 crore, is on account of the higher interest that the government would pay this year because of the excess money it borrowed last year. And it borrowed more last year so to provide stimulus to the economy in the face of a global downturn.

In the budget, Mukherjee also refrained from restoring excise duty cuts announced last December with a view to reviving demand for the domestic industry. The decision to maintain status quo means a few thousands of crores lost in revenues.

That’s the cost the global economic downturn has imposed on the Indian government, besides a higher interest
burden.

Many analysts had expected the finance minister to keep the deficit at last year’s level, or less, by pruning expenses under other heads.

Mukherjee tried to do that. His proposal to give direct fertiliser subsidy to farmers, instead of routing it through manufacturers, is expected to save about Rs 26,000 crore. But such savings are more than offset by the generous hike in allocation for food subsidy (up Rs 9,000 crore from revised estimates), the rural jobs programme (NREGA -- up Rs 2,400 crore from revised estimates) and a host of social services projects (up Rs 14,000 crore) that the UPA government believes helped it return to power.

The other major source of extra spending that Mukherjee couldn’t have avoided relates to security overheads. In the aftermath of the 26/11 terror attacks in Mumbai, modernisation of our police force and improved vigilance of our borders have become a top priority for the government.

From police research and fencing of the borders to buying new vessels and aircraft for our coast guards, the spending liabilities on account of internal security is huge. As a result, capital expenditure on security related measures are expected to rise to Rs 8,670 crore this year, up almost Rs 4,000 crore from last year.

That said, a high fiscal deficit – at 6.8 per cent of the countrys gross domestic product for this year, it’s record in more than a decade – means the government will borrow more. That, in turn, could push up interest rates and crowd out private investors looking to take loans for news projects.

The silver lining is that Mukherjee’s tax revenue estimates for the current fiscal year appear to be conservative. If the economy recovers fast, actual collections may turn out to be much higher and help lower the fiscal deficit.

Moreover, the finance minister spoke of reviving divestment in public sector companies, but he hasn’t assumed any revenue from this source in his budget numbers. Any money that comes from divestment would thus be a bonus.