Why Modi government may have been more fiscally profligate than UPA-II

Contrary to expectations, Narendra Modi's government may have been more fiscally profligate than UPA-II

Unfortunately, it is now widely accepted that we can no longer trust the Indian government’s numbers. And here I am not talking about the widely discussed “new series” calculations of gross domestic product; I am not talking about the discredited “back series” of that same GDP; and I am not even talking about the claims made about job growth using EPFO statistics, which measure formalisation of the economy. I am talking about the most fundamental macro-economic indicators: Those presented in the Budget. 

In the interim Budget presented last week the numbers cannot be said to fairly reflect reality. Consider the claim that India continues to be on a “fiscal glide path” to a deficit of 3 per cent of GDP. This is increasingly hard to believe. The years after the near-crisis of 2013, including the last year of the United Progressive Alliance, featured apparently genuine attempts to cut the deficit. But those attempts appear to have been given up on. 

This year, although there is no major macro-economic crisis, the fiscal deficit target has again been missed — and we are supposed to believe that, once again, we will make the 3 per cent target not this year, not next year, but the year after next. This is like when senior UPA officials constantly claimed that 8 per cent growth was two to three quarters away. Government officials can truthfully point out that the slippage was only from 3.3 per cent of GDP to 3.36 per cent of GDP. However, the “glide path” can no longer be taken seriously, and deserves the same scepticism that the UPA’s insistence received. 

Other projections in the Budget are similarly untrustworthy. No real answers have been given as to why the receipts from the goods and services tax are Rs 1 trillion less than the Budget estimates. If GST revenue increase by about 6 per cent this year, why does the Budget claim that it will go up by about 20 per cent next year? If it does not, what happens to the Budget’s projections? 

Prime Minister Narendra Modi has been given considerable credit for being a fiscal hawk. The evidence suggests, however, that while he wants credit for being a fiscal hawk, he is unwilling to actually rein in spending or increase revenue. It seems that it was in fact the UPA that worked harder on fiscal compression. If you don’t believe that, why not listen to Economic Affairs Secretary Subhash C Garg? He pointed out this week to the Financial Express that “the real expenditure growth during the entire five-year tenure of the previous government was only about two per cent”.

As a consequence of the Modi government’s unwillingness to control spending, the Budget deficit figure is not just unbelievable, thanks to the unrealistic projections, but also downright deceptive. Government expenditure is being hidden by financing spending through other pools of cash that are under government control. A comparison with the first UPA’s off-Budget liabilities, such as “oil bonds”, is revealing. That process was more transparent. The then finance minister, who justly built up a reputation for depending on off-Budget items and spending rollovers, did at least himself acknowledge the problem in his speech: “As a first step, I have shown these liabilities clearly... I intend to request the 13th Finance Commission to revisit the roadmap for fiscal adjustment [to take these off-Budget liabilities into account]”. No such transparency is on display at the moment. 

Illustration by Ajay Mohanty

The mechanisms being used are unprecedented and problematic in a manner quite different from the oil bonds. The small savings fund, for example, is being used to prop up Air India — something that was in the past done out of Budget allocations. This is not the government’s tax revenue to use. It is our savings — our public provident fund money, for example. It is being used for political ends, such as protecting Air India, even though that failing airline is a uniquely awful destination for anyone’s savings. This money should have come out of taxes. Why are we blaming bankers for throwing good money after bad to Kingfisher when the government, as the protector of our savings, is doing exactly the same with Air India? 

Then there is the misuse of disinvestment — which no longer implies the reduction of government control and thus increasing the productivity of capital tied up in the public sector. Instead disinvestment has become an exercise in shifting capital from the public sector to the government, which then uses it to fund expenditure. This is a scandalous misuse of public resources and constantly increases inefficiency and capital misallocation in the economy. Public sector enterprises should use their reserves to invest. 

Other public agencies are being forced to borrow in order to meet government policy priorities, since direct funding has been slashed. The Budget squeezed the highways ministry, for example, raising next year’s outlay by only 6 per cent. The consequence is that agencies like the National Highways Authority of India, although they have no real balance sheet strength, are upping borrowing considerably, at government orders — without this being reflected in the Budget numbers. The NHAI owes Rs 1.5 trillion, and has negligible earnings or cash flow. It finances its past debt by taking on new debt, all with a sovereign guarantee. The roads it borrows against are not its to give away — they are the property of the government. Most expect that the NHAI will be borrowing Rs 60,000 crore from the market and the Food Corporation of India will be borrowing Rs 1 trillion. All of this borrowing — directed and guaranteed by the government — is invisible in the Budget. 

Analysts have begun to point to these negative debt dynamics. Pranjul Bhandari of HSBC has pointed out in these columns that the net supply of government paper has gone up from 6.6 per cent of GDP to 8.2 per cent of GDP in just two years. Sajjid Chinoy of JPMorgan argues that the public sector borrowing requirement has remained “close to” 8.2 per cent of GDP for five years, and so household financial savings “have fallen in recent years from 22 per cent of GDP to 16 per cent”. Most directly focusing on the Centre, Prithviraj Srinivas of Axis Bank points out that the “government directed borrowing has net increased” under Mr Modi: Public sector enterprises now borrow 1.6 per cent of GDP more, while the government has reduced its stated fiscal deficit by only 1.1 per cent of GDP. 

There is only one possible conclusion: Mr Modi deserves no credit for fiscal prudence. He has in fact been more profligate than wise. If private investment has not revived, it is because the government is crowding out private borrowing — flooding the market with its own paper, instead of paying for its spending out of taxes like it should. You can rightly laugh at GDP numbers that claim we grew faster in the demonetisation year than in any other in our history. But if you do believe the GDP numbers, then you should note that there has been a sharp slowdown last year — at the same time that borrowing hit high gear. The Centre for Monitoring Indian Economy said last month that new project starts are at a 14-year low. This is stagnation, not growth. Mr Modi’s big bet — that government spending could kick-start investment when combined with big talk and a little painless reform — has failed. He took over a recovering economy with a tight deficit reduction programme and ran it into the ground.

m.s.sharma@gmail.com , Twitter: @mihirssharma