Does achieving the fiscal deficit target mean anything?

Whether the Indian government will limit its fiscal deficit to 4.8% of gross domestic product (GDP) was a matter of great debate in the run-up to the interim budget presented by finance minister P. Chidambaram on Monday. Hopes of meeting the target were bleak—as spending reached 93.9% of its budgeted target by the end of November—until the government decided to squeeze dividends from public sector companies, and the 2G spectrum auction surprisingly turned out to be lucrative.

Although the government has managed to achieve the deficit target, this hardly changes the larger picture of deterioration of public finance over the years. That governments, driven by populist demands, spend beyond their means has been well recognized; and the current government fits this script well. But three other aspects of this fiscal mess have drawn much less attention.

First, to achieve its fiscal deficit target the government has resorted to accounting gimmickry for covering up ballooning subsidy expenses. The finance minister, in his budget speech, announced the roll-over of fuel subsidy worth ₹ 35,000 crore to the next fiscal, while remaining silent on the roll-over figures for food and fertilizer subsidies—which, taken together, are likely to be more than the amount of fuel subsidy that has been rolled over to the next year.

This is nothing new, however, as the government has used similar off-balance sheet financing techniques to hide debt in the past. In 2007, the government issued interest-bearing “oil bonds” and “fertilizer bonds” to finance its subsidy expenses, which, however, were not accounted plainly as liabilities in the government’s final balance sheet—thus understating the actual amount of debt. If the government were serious about attracting international investors to India, it would perhaps act better than adopt accounting techniques from the playbook of companies like Enron.

Second, as taxes are politically counterproductive, and borrowing in the debt market draws scrutiny by investors, spendthrift governments often find debt monetization an easy form of financing. Towards this end, the Reserve Bank of India (RBI) has played an important supporting role in financing the government’s fiscal deficit over the years. As pointed out by Mint columnist V. Anantha Nageswaran in an article last week, in terms of debt monetization as percentage of GDP, RBI’s monetization programme has in fact trumped the vast quantitative easing programme of the US Federal Reserve.

More often than not, while observers are glued to the hype over the RBI’s interest rate actions, the central bank continues to provide easy financing to the government through the backdoor. RBI’s accommodative stance towards the government may be helping the government to keep its borrowing costs low, but it has come at the cost of inflation that has remained painfully high over the past five years. The debt monetization programme under way, in other words, has only reduced the purchasing power of the rupee by socializing the costs of government spending.

Third, the government’s decision to squeeze public sector units (PSUs)—which have gained windfalls from their foreign investments following the devaluation of the rupee—to meet the fiscal deficit target signals only its willingness to continue its wasteful spending habits come what may. (Liquidating capital locked in PSUs through divestment could be good for the economy, but that’s for another day). But sadly, it is now having to stretch beyond its usual means of collecting revenues to pay the bill.

This does not present the picture of a government that is shrinking in size by cutting down expenditure, but that of one which continues its wasteful spending binge (even in the wake of a faltering economy) by mis-allocating more resources from other productive ends.

The government may have achieved the fiscal deficit target, but accounting gimmickry, debt monetization, and the plunder of PSUs mean it still does not convey the message of fiscal discipline.