There is something endearing about the desire of the Modi government to be fiscally correct in the amount of debt it piles up.
Chrometophobia – the fear of debt
This single-minded adherence to being fiscally correct was much in evidence during the Jaitley years when reduction of the fiscal deficit (FD) below 4.5% of GDP, where the UPA had left it in 2013-14, became an obsession. Meeting the stiff target of 4.1% FD during its first year in office was an emblem of its determination to right all the fiscal profligacy of the past.
The FD did reduce to 3.5% within the first two years, in part helped by the lower prices of imported oil. But from 2018-19 slowing growth, growing ambition in infrastructure schemes and limited reform on existing subsidies, pushed it back up to 3.9% in 2019-20 (itself an underestimate since off-budget financing increased significantly).
During the current year, the government has wisely, albeit implicitly, loosened its FD target from the budgeted Rs 7 trillion to Rs 12 trillion – an inevitability since by end August, the FD was already 7.8 trillion.
The choice of the new FD target is intriguing. Is it a mere coincidence that it will be between 6.5% to 6.9% of the expected GDP – Rs 183 trillion, if GDP is 10% below last year’s level of Rs 203.4 trillion (Provisional Estimates May 2020) or 6.9% should GDP fall to 15% below last years?
Under the UPA, the highest FD reached was 6.9% in 2009-10. So, the new target seems guided more by competitive “report card” politics rather than a careful aggregation of fiscal need.
The “competitive” game in fiscal outlays does not sit well with the gravity of the economic situation. The level of incremental debt proposed should be guided by what we intend to do with the additional resources.
Focus on the quality of spending not the level of the Fiscal Deficit
If the debt is to be used to recapitalize public sector banks, thereby lowering their cost of operations, which would feed into lower interest rates for customers, a cap on FD makes no sense at all. International rates are at near negative levels so borrowing abroad to provide against the NPAs of public banks makes sense, even as the resolution process is speeded up outside the now discredited quasi-judicial NCLAT process.
At the best of times, a judicial intervention should not seek to substitute normal business processes. Debt recognition, restructuring and resolution is one such. The law should only seek to pose a credible threat of “directed decision making” (inevitably sub optimal) to hasten all parties to the negotiation table.
Carte blanche must be given to bank managements to negotiate and close restructuring deals without fear of administrative reprisals. Such powers will surely be misused. But the economic cost of striving for “zero tolerance for corruption” was never an optimal business or governance solution.
With private investment waning, if incremental public debt is used to fast forward construction activity – especially the completion of abandoned private sector projects- it can only create much needed economic activity and jobs.
Funding wasteful revenue expenditure from debt is a one way street to fiscal instability
The real worry is that incremental debt is not financing productive capital expenditure. Instead, it is being used to finance wasteful revenue outlays. By August end the FD was 9% higher than the annual target. But the Revenue Deficit at Rs 7.4 trillion was 22% higher than the annual target.
More funds to implement the much-needed social protection programs launched under the Covid package are necessary. But they should be financed by reallocating the existing revenue expenditure towards them and slashing wasteful, non-productive, business-as-usual revenue outlays. Introducing a lower and hard public sector budget constraint is also a great public outreach tool, much liked by credit rating agencies, bond markets, and 95% of Indians who work outside the government.
In simple terms, switching off the office lights earlier is better than not building the next latrine or affordable house. It also means that measures to enhance revenues and reduce cost are desperately needed like levying normative cost-based user charges on irrigation, energy and water supply, bus and railway services and converting all public sector annual pay increases and inflation adjustments into medium terms government bonds redeemable with interest.
The budgeted outlay on the establishment of the Union government this year is Rs 6.1 trillion. It was Rs 5.2 trillion in 2018-19. Even as the economy slowed by 15% per year the overhead costs rose by 15% over the last two years. The swollen allocation for establishment should be wound back to what it was in 2018-19 saving the government Rs 90,000 crores.
There is something grossly colonial about the average Indian suffering pay cuts, job losses and battling persistent high inflation (6%), whilst government officials profit from inflation by getting 100% pay increases indexed to inflation!
Despite the expenditure cuts, there will still be a gap between the reduced revenue expenditure and the available resources because tax revenue by August end was 25% below last years levels just like the GDP. Agriculture has remained resilient and fared well but sadly it remains a net soak pit of subsidies, not a tax revenue generator.
By year-end there shall be a hole of around Rs 6 to 8 trillion versus the budgeted tax receipts of Rs 16.36 trillion (receipts till August end were just Rs 2.8 trillion).
Fast forwarding sale of PSEs can recapitalise public sector banks
Non-tax capital receipts of Rs 2.1 trillion from disinvestment were targeted this year. But that was a “zamindars, business-as-usual selling the jewels to fund expenditure” allocation.
The quantum of disinvestment should be guided by what is needed to clean up bank finances within the next two years – possibly around Rs 3 to 4 trillion, thereby making the process “non-invasive” on the budget. PSE shares have lagged shares of leading private companies and banks in the recent stock market surge because there is no plan to get these assets under market-driven, hands-off, board-level management.
The economic advantage from a revived financial sector will generate manifold benefits in investment, growth, and jobs. Every 1% of growth generates 1.2% of tax revenues.
Visionary husbanding of the existing assets and resources is desperately necessary to limit the additional debt within the Rs 12 trillion mark this year and possibly a similar amount next fiscal year.
Rest assured, even two years hence, the economy will not settle back into the pre-Covid inertia. Resilience to this uncertainty requires tightening the public belt on wasteful outlays like end-of-pipe skills development, “nation building” cultural extravaganzas and “trophy” projects, which are the favorites of fly-by-night entrepreneurs.
Also available at TOI Blogs October 4, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/wanted-visionary-husbanding-of-public-finances/