Fiscal folly

India’s budget: India missed a trick or two with its latest fiscal budget. Projections from Finance Minister Pranab Mukherjee of a moderately declining deficit make sense only by ignoring the funny accounting and assuming the economy keeps rocketing ahead. With state spending, inflation and commodity prices all increasing, India looks like it’s choosing a role model more Gordon Brown than Deng Xiaoping.

Mukherjee’s budget showed the fiscal deficit for the year to March 2011 at 5.1 per cent of GDP compared to a budgeted 5.5 per cent, while the budgeted fiscal 2012 deficit declined further to 4.6 per cent of GDP. However, the declining deficit-to-GDP ratios made use of a fudge. It included revenue of $23 billion (1.3 per cent of GDP) from selling telecom spectrum. Meanwhile, the numbers were aided by rocketing 2010-11 growth of over 20 per cent in nominal GDP. Some of Mukherjee’s additional spending is difficult to quarrel with — a new program of food handouts for the poorest makes sense while prices are soaring, although its managers risk distorting the domestic food market and damaging agricultural output. However the new program should have been funded by reducing fuel subsidies, which are politically popular but hugely expensive and mainly benefit the middle class.

India’s overall budget arithmetic is askew. With rapid growth persisting for several years, a responsible budget would see a balance or even surplus, taking advantage of the revenue surge to improve India’s debt position rather than indulging in additional spending. With inflation once again approaching double digits, real interest rates negative, and commodity prices (and therefore subsidies) increasing, the chances for a worsening in India’s budget position increase.

The most important economic duty of India’s government is to avoid killing the private sector goose that lays the growth golden eggs. This Budget at best maltreats the beast. India’s refusal to reduce deficits after several years of boom is reminiscent of the budget policies of Britain’s ahead of the financial crisis, rather than of the successful austerity practiced by major generators of economic growth such as China. The result may be similarly unpleasant.