India has a budgeting problem, like any other middle-class household. Aspirations are larger than means, possibly, driven by the doubtful glory of being the fourth largest economy and politically primed, by future expectations of becoming a “developed” country by 2047. Coddled by obliging import tariffs, clunky private corporates are risk averse and the financial sector dominated by public sector banks and institutions. Protected MSMEs and agriculture are low productivity and supply low value-add, low wage jobs. This leaves public investment to bear the brunt of investment, spiking the fiscal deficit and public debt beyond sustainable levels
Trapped in doing everything at once
Social media obligingly spreads exaggerated achievements and projects a dazzling future, generating impossibly high public expectations, to meet which meagre resources are rationed widely. Expectedly, the completion time for projects gets extended, increasing completion costs and reducing the value-add from incomplete investments. Unsurprisingly, the cost of project overruns is estimated at Rs 4.8 trillion per annum or about 20 percent of the original project cost.
Like any modern middle-class family, India borrows to meet the resources gap. To its credit, India abides by the metrics of credit worthiness. First, it has never defaulted on debt servicing. Second, fiscal rules bind both the Union and State governments expenditure to limit borrowing. How long this restraint lasts in a world desperately trying to bolster growth but drowning in debt, remains uncertain.
The debt fueled illusion of wealth
Global government debt increased more in emerging markets (EM) from 44 percent to 69 percent of GDP over 2010 to 2023, than in advanced economies (AE) 105 percent to 112 percent of GDP. Public debt in China increased from close to the EM average in 2010 at 44.3 percent to 84.3 percent in 2023. Public debt in India in 2010 was already higher than the EM average at 65.6 percent and increased further to 81.6 percent of GDP in 2023. Are we hoping that the mirage of developed status by 2047 can rub off on us today and allow us to borrow as an AE does? China too is well above the EM public debt level but, crucially, unlike us, it also has per capita income close to high income economies whilst ours is towards the bottom of upper middle-income economies per World Bank norms.
Cutting the coat per the cloth available
What would cutting back public debt levels imply? First, new borrowing must be less than debt repayments. Second, GDP must grow rapidly at least 2 percentage points above the average level of 6.5 percent, where it is today, to reduce the debt to GDP ratio. Third, the investment push for growth must come from monetization and disinvestment of public assets, foreign, and domestic private investment. To become a China Plus One or an America Plus One destination, all foreign investments must be welcomed along with binding advance-tax guidance and contracts conforming to international best practice, to reduce investment risk. Budget 2025 could usefully remove the artificial tax preference for investment in equity as opposed to debt, so that middle class savings are more balanced. Deepening close oversight by RBI over irresponsible bank/FI lending is crucial.
Movable stability metrics muddy the message
Maintaining fiscal deficit (FD) norms gives credibility to government’s resolve to be fiscally prudent to cheer up investors. In 2017 the outside limit for Union government fiscal deficit (FD) was increased from 3 to 4 percent of GDP, pushing the normative combined FD (Union and states) to 7 per cent of GDP from 6 percent earlier. Over the last three decades between 1984 to 2017 (spanning both UPA and the early Modi 1 period) FD was 7 in fourteen fiscal years – so was this just a shift in the goal post to fit the actual? It seems so, because the older FD “norm” of 6 percent of GDP (both Union and states) was met only four times in fiscal years 1983, 2007, 2008, and 2018. The Covid 19 related fiscal deficit spike took the general FD to 13.1 percent in 2020-21. Despite the waning of the epidemic, higher FD remains high at around 7.9 percent (3+4.9).
Inflation – the handmaiden of high fiscal deficits
It is no surprise then that the Reserve Bank of India finds it difficult to drive inflation “back into the forest” or to reduce interest rates to stoke growth. Since 2016 the RBI’s primary task is to manage inflation (Consumer Price Index basis) within a band of 2 to 6 percent with 4 percent as the median. Inflation was higher- between 7.5 to 10 percent since 1981 except in two five-year periods when it was 4 percent -2001 to 2005 and 2016 to 2019 (both under NDA led governments), reverting thereafter to an average of 6 percent. Inflation declined from 6.21 percent in October 2024 to 5.22 in December 2024. But it remains above the norm of 4 percent while the upside risks have multiplied.
Is inflation accounting done in a statistically sound manner?
An NCAER 2024 report recommends reducing the share of food in the CPI to 40 percent from 48.5 percent because higher incomes have diversified the consumption basket. Rationalizing the food share can reduce inflation statistically. Appearances matter when one is competing globally for capital.
Budgeting for growth
Avoid “prestige projects” (rebuilding Parliament stimulates vanity not growth), minimize “pork” (freebies for the party faithful to enhance vote share) focus spending on projects with the highest value add potential. Targeted spending requires current and accurate data which means improving the quality of Indian statistics. The Union government must resist becoming a fiscal supermarket where all supplicants find relief. Union allocations should focus narrowly on national physical and digital networks, making banks more competitive, incentivizing corporate investment in space applications, agricultural and industrial R&D and market development, and leave the vote catching “ease of living” components- affordable homes, drinking water supply and sanitation, cheap energy supply, municipal and rural development, culture, social welfare, city management to state governments.
The Union government is bloated.
In 2017-18, when the railway budget was merged with the main budget, there were 73 major schemes. By 2024-25 the number of major schemes, each with an allocation of more than Rs 10 billion, had more than doubled to 170. Those below Rs 10 billion are additional. Each scheme imposes additional administrative costs and disperses funds in discrete pockets, reducing the efficiency of the use of funds. Beware of the negative dynamics of centralization. Disbursing Union funds under generic frameworks, and leaving branding and scheme specifics to state governments, is a better option. In the age of startups, tapping growth opportunities is easier, if those closest to where the rubber meets the road, are fiscally and administratively empowered, rather than just the Head Office.
First published in the Asian Age January 28, 2025
Opinion India 