The swan song is off-tune

The latest estimate of the government’s finances released on Monday by the outgoing United Progressive Alliance (UPA) regime has confirmed what experts had predicted — that all key financial numbers would deteriorate sharply in less than a year, eroding all gains made in the first four years of this government.

The fiscal deficit, which is the amount by which the government’s spending exceeds its revenue and interest payments, has widened to 6 per cent of the gross domestic product — the worst in the current decade.

The government blames the twin factors of economic recession affecting the domestic economy and measures taken to blunt the spike in metal and fuel prices in the first half of the current financial year as the reasons for the worsened fiscal snapshot.

“The government cannot be blamed as global factors took control in the last one year,” Indranil Pan, chief economist with Kotak Mahindra Bank, said in an earlier interview.

The fiscal deficit increased as aggregate revenue receipts, which include both tax and non-tax revenues, declined by nearly Rs 50,000 crore in the revised estimates for the current financial year as compared to the Budget estimates. The total expenditure, as stated in the revised estimates, went up by 20 per cent.

The Congress-led UPA alliance presided over an economy that grew at its fastest rate ever, with an average growth rate of 8.6 per cent. In the first four years, till March 2008, it was able to rein in fiscal deficit and managed to raise the tax to GDP ratio every year.

The ratio increased from 9.8 per cent in 2004-05 to 12.5 per cent in 2007-08. This helped increase social sector spending and initiate one-time measures like waiver of farm loans, which had led many to suicide. However, the tax-GDP ratio is projected to come down to 11.1 per cent in 2009-10, as against the target of 15 per cent by March 2012.

With Finance Minister Pranab Mukherjee pointing out that tax rates need to come down when the economy is decelerating, it is unlikely that the government will meet the medium-term fiscal targets.

The current account deficit, a statement of the country’s inflow and outflow of foreign money arising out of trade, investment and others, was $22 billion till September 2008. It was $2.47 billion when the UPA took over.

In contrast to the UPA government’s tenure, the Bharatiya Janata Party-led National Democratic Alliance (NDA) came to power when the East Asian currency crisis was not yet over, and had to tackle global slowdown in the middle of its tenure.

During the NDA rule, India’s economy recorded a meagre 3.8 per cent growth in 2002-03, the second slowest since the economic reforms began in 1991. In terms of key macroeconomic parameters, like the current account deficit, this alliance made significant progress. The average inflation rate too was tamed and ranged between 3.27 per cent and 5.46 per cent, well within the Reserve Bank of India’s comfort zone.

An analysis of the NDA government’s fiscal performance reveals it was able to consolidate, as reflected in the declining fisc-al deficit and increasing tax collection in its five-year rule.