Time for a relook at the idea: Why not a per capita budget deficit

If high deficits were going to crowd out private investments or raise interest rates, it was seen as inimical to the political objective, says the author

Back in 1986, when Rajiv Gandhi was stoking GDP growth by increasing the budget deficits, I wrote about the need for the notion of a per capita deficit. One of my economist friends, who has gone on to great glories, poked severe fun at me. But I still think he was wrong.
 
Thirty two years on, it might be worth taking a relook at the idea. It is rooted in two realities: universal franchise and increasing poverty/inequality.
 
Basically, the issue is this: if a country has to incur a lot of welfare expenditure, which in a highly competitive democracy it must, should it tie the budget deficit to the GDP — which is an efficiency measure and an financial/economic must — or should it tie it to the number of intended beneficiaries, which is an equity measure and entirely political in character?

 

Or, here’s a simpler example. Consider a family whose welfare is the responsibility of the parents. How should they order their borrowing if their income is insufficient to support all members in the same manner in the short and medium term?
  
Please think before you answer. And don’t ride the two horses of efficiency and equity at the same time.
 
GDP vs per capita
 
The problem is this. Suppose the deficit was Rs 100 in 1988 and the population 50. In a manner of speaking, the deficit per head was Rs 2.
 
Suppose that by 2018 population has grown to 90. How much should the deficit be? What if it doesn’t match the notional number of 3 per cent of GDP that rules the roost now? What if it needs to be higher because the politics constrains the rate of growth of GDP?

 
Remember that in 1951 India had about 350 million people. Today that is probably the number of people below the poverty line who need massive welfare support. If health, education and income support are all counted, the number could be closer to a billion.
 
Orthodox economists will dismiss this as pure nonsense. But that is because they don’t have to deal with the problem of social stability in a politically and socially turbulent environment. Nevertheless, it is a reality that can’t be assumed away.
 
What is needed
 
Whence my plea to better brains than mine: start thinking about a measure of the budget deficit that is not linked to GDP alone because that has a history — and politics —that had more to do with the first Latin American debt crisis of 1982-88 than any particularly stringent notion of “fiscal discipline” as we understand it today.

 
The 3 per cent thing was conjured up by the IMF as a way of giving the bond markets a peg to hang their coats on. It has as much sanctity as any religious benchmark. 3.5 per cent or 4 or 4.5 or even 5 would have done just as well.
 
More to the point, it was linked to the needs of the city of London and Wall Street which took the form of Reagan-Thatcher objective of pushing the government back and letting the private sector do most of the heavy lifting.
 
If high deficits were going to crowd out private investments or raise interest rates, it was seen as inimical to the political objective. So the need to keep them low was invented.

 
The political and economic objectives were, in a very large measure, because of two things: there was flood of petro-dollars flowing into Western banks following the sudden increase in the revenues of the Middle East after oil prices started rising dramatically in the 1970s; and there were the massive US deficits of the 1960s and 1970s arising from the Vietnam War which pushed an ever-increasing number of dollars into the market. Both lowered the returns for the fat cats.
 
Reagan and Thatcher made a pact with them that they would give more room to them to earn higher returns by reducing the amount governments borrowed. This has been the orthodoxy since the 1990s. And India has followed the formula blindly to keep capital inflows up because it just doesn’t seem to be able to export very much. But the time has come for Indian economists to come up with a new benchmark number.