BackFiscal deficit: a holy cow?
The finance minister seems to be taking the fiscal deficit target of 4.1% of GDP as sacrosanct, presumably to satisfy the rating agencies
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Recent reports suggest that our finance minister seems to be taking the fiscal deficit target of 4.1% of gross domestic product (GDP) as sacrosanct, presumably to satisfy the rating agencies. The bigger worry is that in order to meet the target, capital expenditure would be slashed: and we badly need larger public investments, particularly in infrastructure, if growth is to improve. (Hopefully, in the next budget, the finance minister would bury the increasingly meaningless distinction between Plan and non-Plan expenditure, replacing the nomenclature by capital and revenue expenditure.) One wonders whether he would be tempted to indulge in creative accounting and higher interim/advance dividends from the public sector units (PSUs) to somehow meet the target. Disinvestment may once again need to rely on financial institutions in the public sector to meet the revenue target. The other side is that this merely reduces the PSUs’ ability to grow and invest. The politically weaker National Democratic Alliance (NDA) government under prime minister Atal Bihari Vajpayee was more radical and actually privatized some PSUs. Its present avatar, though far stronger in parliamentary terms, seems to shy away from privatization/closure of perpetually sick PSUs. Surely, public resources have more productive demands on them?
Coming back to the budget deficit, we often forget that the government’s gross debt as a percentage of nominal GDP has been falling year after year thanks to inflation. Also, what is perhaps more relevant is the net debt rather than the gross debt. In other words, we should also be considering the value of assets of the government of India. (One example: the railway system alone would be worth trillions of rupees!). Has a time come for us to adopt the International Public Sector Accounting Standards to have a better idea of where exactly government finances stand?
The budgeted fiscal deficit is not a holy cow. As for the last expression, perhaps the finance minister should be reminded of what the late V.D. Savarkar, the intellectual father of Hindutva, wrote a long time back: the cow is not mother, nor holy, nor a goddess. She is but a useful animal, as is fiscal accounting. As for the rating agencies and their judgements, Standard and Poor’s is likely to enter into a billion-dollar settlement with the US authorities for its practices in rating mortgage-backed securities, which led to the financial crisis of 2007-08. Surely we should not give it too much importance in policymaking?
As for the government’s Make in India campaign, I recall an incident from the early 1980s about calculators. Indira Gandhi, the then prime minister, proudly presented a Made in India calculator to a visiting head of state as a token of Indian manufacturing prowess. The reality was that only the cover had been manufactured and affixed in India, something which the prime minister obviously did not know. The reason for remembering the story is the recent directive supposed to have been given by the Prime Minister’s Office to government departments to buy only Made in India electronic goods. One wonders whether the directive would only lead to similar Made in India goods.
One reason for such worries is that Nokia, which was manufacturing mobile phones for the global market in India, recently closed down operations because of taxation uncertainties. So has Foxconn, its main supplier/contract manufacturer. Micromax, the only successful Indian mobile phone brand, gets the actual manufacturing done in China. And, Xiaomi, the Chinese electronics company, which is coming up very fast in the global markets, is likely to establish a research and development centre in India, but continue to manufacture in China. There is no doubt in my mind that we do need to focus on Make in India, as the Prime Minister has emphasized, but directions to buy Indian are not the right way. The reality is that from 19th century Britain, where the Industrial Revolution started, no country has grown rapidly except by starting with labour-intensive manufacturing: China is only the latest example. In our case, manufacturing as a percentage of GDP has remained stagnant for more than two decades, and our share of global exports has been coming down since 2011.
Our central bank governor, in his Bharat Ram Memorial Lecture last month, expressed pessimism about replicating the Chinese model, partly because global demand is low: this is surely true of the European Union and Japan, but the US seems to be back on the growth path after the crisis of 2008, and while China is slowing, it is still likely to grow at over 7%. The governor would like to change the focus from Make in India to Make for India. One wonders whether this means import substitution. While that clearly is needed, we should not forget that export pessimism and focus on import substitution were the cornerstones of our industrial policy for several decades. One of the end results was the so-called Hindu rate of growth, which barely kept pace with population growth. We do not need Ghar Wapasi of that kind!
Nor is one very impressed by several initiatives of the NDA in the financial sector. The Jan Dhan Yojana launched with great fanfare has managed to open 100 million accounts: but the aggregate balance is barely ₹ 8,000 crore. The first decision of the NDA on coming to power was to appoint an investigation team to bring back unaccounted money supposed to be held outside India. So far, nothing seems to have been achieved.
A.V. Rajwade is a risk management consultant, columnist and author.
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