Largesse strains fiscal deficit targets

It's been 4 years since the Congress-led United Progressive Alliance came to power but the real test for the government comes in its final and the most crucial year in office.

The problems are not new, but because of delayed solutions they are now very close to changing into a crisis.

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Problems like high oil prices are beyond control and some others like farm loan waiver are self-created because of political compulsions.

On Friday, the government raised the farm debt loan waiver amount to Rs 71,860 crore from the earlier announced Rs 60,416 crore. So far, it has taken short-cuts like issuing oil bonds without raising domestic fuel prices. Besides oil bonds, it has also issued Rs 48,000 crore of fertiliser bonds in 2007-08.

Economic logic says that government expenditure should increase because of these extra expenses. However, there is a catch.

Economists point out that all oil bonds and a part of fertiliser bonds are not accounted for in the Budget. This means that the government does not have to include these expenses while calculating the surplus or deficit for the year.

Subir Gokarn, Asia Pacific economist at rating agency Standard & Poor's, says that oil bonds are just liabilities and not real expenditure for the government and hence, technically, they cannot be added to the fiscal deficit.

Fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowings). India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07.

The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09, but looking at the way things are going, economists say, it is unlikely the government will meet its target.

"Though the bonds are not really expenditure, it is a liability in spirit since no asset is being created against them. These expenses could add about 1% to the deficit. Besides oil bonds, there are fertiliser bonds and farm loan waiver. But the government has been very specific that it is not looking at raising extra finances for it. How they would provide that money would also have an impact on the deficit," Gokarn says.

However, the sheer magnitude of oil and fertiliser subsidy numbers is forcing economists to take notice.

Apart from oil, subsidies on food and fertilisers have also gone up because of a sharp increase in commodity prices.

"The Pay Commission impact could be to the tune of Rs 15,000 crore. There has also been a revenue shortfall because of, among other things, cuts in excise and customs duty on some commodities," says Sonal Varma, India economist at Lehman Brothers.

However, some differ. Ishwar Hegde, chief economist at Essar group, feels that finance minister P Chidambaram cannot go wrong with his estimate of a fiscal deficit of 2.5% for this financial year because he has got a "cushion of record tax collections" to work with.

Tax collections were at a record Rs 5,88,000 core in 2007-08 helped by robust economic growth and corporate profitability. However, with growth likely to slow down in 2008-09, it remains to be seen whether the same buoyancy will be maintained.

Also, not every expert believes fiscal deficit is worrisome. Dr Ashima Goyal, professor at Indira Gandhi Institute of Development Research, believes a high fiscal deficit is an indication that the government is spending more on "productive expenditures."

"The government should adjust the taxes imposed on petroleum products. If the taxes are brought down, then the oil firms will have more money on their hands and the government can issue fewer bonds," says Goyal.

Gokarn points out that though it is right that the government spends more in times of a slowdown, in the Indian context the deficit is structural.

"The deficit in India is structural because things like oil bonds and salaries will continue to widen the deficit. It is not like unemployment dole, which is cyclical because when unemployment decreases the dole also decreases. Higher deficit will shore up growth but it won't be good in the long run," he adds.

Though analysts agree that it is unviable for the government to keep doling out subsidies, they are not sure how long the government can continue doing it.

"Though oil bonds are unviable, because of political compulsions I do not see the government doing away with them and it is handicapping the economy," says Hegde.

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