Some commentators have been warning that the country’s fiscal position is approaching the crisis levels reached in 1990-91. The chart compares some of the benchmarks for that crisis-ridden year with those of 2011-12.
While the fiscal deficit for 1990-91 was well above that for 2011-12, the revenue deficit wasn’t, although the finance minister says the “effective revenue deficit” is lower, because grants for the creation of capital assets should be excluded. But we do not know how large these grants were in 1990-91, and hence, have no way to compare the so-called effective revenue deficit that year.
The current account deficit for 2011-12, estimated at around 4% of the gross domestic product (GDP), is also higher than the 3% of GDP it was at in 1990-91, but then foreign exchange reserves are much higher today.
The total central government expenditure as a percentage of nominal GDP was lower in 2011-12 than in 1990-91, but the proportion of revenue expenditure in the total expenditure is much higher now. Also interesting is the break-up of that expenditure. If we take the three major heads of expenditure—interest payments, subsidies and defence payments—we find that interest payments as a percentage of the total expenditure has remained more or less the same. Defence expenditure, however, has come down as a proportion of the total expenditure. Subsidies, though, have increased dramatically, from 11.5% of the total central government expenditure in 1990-91 to 16.4% in 2011-12. What’s more, they’ve even increased as a percentage of nominal GDP, from 2.36% to 2.63%.
The numbers show that while we are certainly nowhere near the stage of having to pledge our gold to cover the current account deficit, it’s also true that some of the fiscal measures are in worse shape today than they were during the 1990-91 crisis. Subsidies, because they are so difficult to reverse, will likely continue to keep the fiscal deficit bloated in the current environment of low GDP growth. Coincidentally, in 1990-91, we had a GDP growth rate of 5.3%, the same as in the fourth quarter of 2011-12.
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