We live in difficult times. The financial meltdown has not left any time to think about any other issue during the last one month. The time is to save capitalism from itself. Indeed, as Lord Keynes said, “Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.” Of course, recent events have shown that these wickedest men need to be regulated if it has to benefit everyone. In fact, even a significant event, viz, the passage of the supplementary budget authorising the government to spend an additional Rs 237,286 crore equalling about 4.5 per cent of GDP, did not receive much notice. The supplementary demand constitutes a 33 per cent increase over budget estimates. Is it the case of the tail wagging the dog? There has hardly been any detailed analysis of the macroeconomic implications of these supplementary demands.
In many ways, this can only be expected. Most analysts are amazed at and concerned with the financial meltdown that has spread across the world with astounding speed and ferocity. There is considerable uncertainty in the financial markets, and the preoccupation has to be to restore confidence in them. As Paul Krugman stated in the context of the United States, this is surely not the time to worry about deficits. The problem, however, is different. If indeed, these additional expenditures were meant to meet the financial crisis in terms of speeding up various infrastructure projects on national highways, ports and the power sector, they would be justified. If, however, it shows the fiscal situation in poor light, that could add to problems.
A close analysis of the various expenditures included in the supplementary demand shows that these cannot in any way be characterised as measures to combat the financial crisis. Surely, any additional expenditure would help to arrest the possible slowdown in the economy, but these expenditures have already been factored in the budget though they were not made explicit. In other words, a supplementary demand of this magnitude was only to be expected. The supplementary demand, thus, provides the first estimate of the expenditures required to finance various pronouncements made in the budget. Writing on the budget, this columnist had stated that the budget hid more than it revealed and there is more curiosity on what was hidden than what was revealed. Thus, surely, the financial crisis has not triggered these additional expenditures, though it might have underlined the urgency of putting them before Parliament.
Of the additional expenditures amounting to Rs 237,286 crore, the net cash outgo is estimated at Rs 105,613 crore or 2 per cent of GDP and the remaining Rs 131,672 crore or 2.5 per cent of GDP is to be matched by additional receipts/recoveries or met from the savings of ministries and departments. Out of the net cash outgo, the fertiliser subsidy accounted for Rs 38,863 crore, pay revision contributed to Rs 22,700 crore, food and edible oil subsidy constituted Rs 5,064 crore, and additional provision for the National Rural Employment Guarantee Programme was Rs 10,500 crore. Together, these items constitute over Rs 92,000 crore or 1.75 per cent of GDP. In fact, these are partly the carry-over of previous year’s expenditures and partly the unfunded proposals in the budget.
Interestingly, the additional expenditures that are meant to be met from the savings of other ministries and departments and unbalanced receipts are not really savings. A significant portion of them is off-budget liabilities. Of these, three items constitute the bulk — the bonds issued to fertiliser companies (Rs 14,000 crore) and oil companies (Rs 65,942 crore), and expenditure to be met by drawing down the farmers’ debt relief fund (Rs 25,000 crore). These items constitute more than 2 per cent of GDP.
With the presentation of the supplementary demand for grants, some portion of the deficit has come into the open and some other part has been made explicit as off-budget liabilities. In fact, additional cash spending will add to the deficits unless additional revenues are mobilised or in the unlikely event of compressing expenditures elsewhere. The revenues are not likely to show the buoyancy assumed in the budget due to the economic slowdown, but the proceeds from the 3G spectrum auction could bring in Rs 40,000 crore. Furthermore, it is suspected that salary revision and arrears could exceed estimates. Thankfully, as oil prices have remained low, the under-recovery will be substantially less and this will not add to the fertiliser subsidy burden. However, as we approach the elections, there will be greater demands.
The expenditures included in the supplementary demand are likely to add to deficits. The entire cash outgo of 2 per cent of GDP is in the revenue account which will directly feed into both revenue and fiscal deficits by the same magnitude. The remaining 2.5 per cent of GDP would add to off-budget liabilities. Thus, almost 4.5 per cent of the unfunded and off-budget liabilities have been brought into the open in the supplementary demand for grants. The Economic Advisory Council to the Prime Minister, by assuming the oil prices at $120 a barrel, had estimated these liabilities at about 5 per cent of GDP. As the year passes by with additional demands placed on public spending, it would not be surprising if government liabilities exceed this.
Indeed, this is not the time to worry about deficits. As N K Singh states in his well-thought-out recent column (Times of India, October 27), the need of the hour is to be bold and hasten the implementation of various infrastructure projects and provide adequate funds for the speedy implementation of national highway development, power projects, ports and airports. Significant public spending on these can spur private investments as well and we can stage recovery faster. Indeed, the absence of fiscal space constrains new initiatives and manoeuvrability for the government to effectively hasten revival. The optimists may say that the government should “dig holes in the ground paid out of national savings.” But in an economy with perennial infrastructure deficit, we could do well to increase spending on these and increase the productivity and employment potential of the economy. Maybe fiscal fundamentalists should look the other way and hope for faster recovery.
The author is Director, NIPFP. The views are personal. Comments at email@example.com