Following the earlier hints by the finance minister about difficulties in meeting the fiscal targets for 2011-12, the mid-year analysis of the economy issued last week also raised the possibility of a fiscal slippage, albeit a modest one. Such candor is welcome, even as the admission is likely obliged by India’s growing global integration, the mechanics of which forces even the most profligate governments to discipline, or at least explain, themselves.
Thus the report specifically addresses analysts’ concerns about India’s deteriorating fiscal position. It underlines that the “record of the fiscal performance of the Center in recent past… is impressive” (Para 3.16, pg. 78). As trends go, this one begins with the cyclical upswing from 2004-05 when revenue buoyancy is higher. Analysts are no fools though. So if you extended the table backwards to say 2000-01, you would get to see how the commendable fiscal performance is solely driven by the growth dynamics with the persistent structural deficit showing little, if any improvements in more than a decade! Come back to 2011-12 and then again, we can see that the lower-than-expected GDP growth this year will help in explaining missed targets.
The claim that the fiscal policy stance for 2011-12 is on consolidation track also rings hollow. Sure, the deficit is projected to decline to 4.6% of GDP in 2011-12 from the better-than-budgeted outturn of 4.7% of GDP in 2010-11 (vis-à-vis 5.5%). But consider some recent distortions in the public balance sheet that suggest anything but consolidation.
To begin, the revenue deficit remains stuck at 3.4% of GDP in 2010-11 and 2011-12, notwithstanding the remarkable growth rebound of 8% and 8.5% in 2009-10 and 2010-11. With admission of possible fiscal slippage this year, there is every possibility of a further widening as growth falls below trend. Worse, nearly 35% of total expenditure has been financed through market borrowings in the last two years; this compares with an average 25% when growth has been above trend in the past (2004-07), indicating the deterioration.
The widening revenue-expenditure gap is also increasingly bridged by one-off revenues from auctions and disinvestment: were the mid-year review to delve under the consolidation surface, we would know that financing by selling the family silver has zoomed from just 1% of the fiscal deficit in 2007-08 to 6% in 2009-10 and 2010-11; it was set at 10% of the fiscal deficit for 2010-12. Unintentionally however, the report highlights the increasing dependency of India’s fiscal situation upon the stock market when it talks of the challenges related to ‘disinvestment and telecommunication spectrum auctions’ (revenue targets of Rs 400 billion and Rs 130 billion in 2011-12). Along with the current account deficit, that makes two of a pair!
Most disturbing however, is the phenomenal growth in subsidies, which have grown at an average, annual rate of 31% between 2006-07 and 2010-11. The review characterizes such expenditures as one of the ‘structural problems’ of public balances. One wishes then that the outlook of the mid-year analysis, which talks of a ‘graduated path’ of fiscal consolidation, had allayed analysts’ concerns by charting one such course.
Renu Kohli is a macroeconomist based at ICRIER, New Delhi; she is a former staff member of the International Monetary Fund and the Reserve Bank of India.