A new dictionary of deficits4 min read . Updated: 04 Mar 2012, 08:35 PM IST
A new dictionary of deficits
A new dictionary of deficits
In its present form, the arithmetic and the analytics of the Union budget revolve around five deficit numbers: fiscal, revenue, primary, monetized, and current account deficits. All of them came to the fore ever since the budget was transformed into a fiscal policy document after fiscal stabilization in 1991.
Given the current global context and the domestic macroeconomic situation, the budget needs to be reinvented as a public expenditure policy document. The public expenditure policy underlying the budget has to be in line with the extant ground realities of Indian economy and not in terms of prescriptive fiscal indicators of the government.
Raw material deficit: The biggest problem facing the country today is the lack of raw materials. Indeed the profitability of manufacturing enterprises in the basic and intermediate goods sectors has been reduced to an arbitrage on the input prices. And if the problem is not addressed, it will become a binding constrain on growth itself.
If profitability is a signalling device for resource allocation and investment in a market economy, then the unambiguous signals emanating from the Indian economy are that raw material production is more valuable than finished goods.
The growing shortages and the paradigm shift in commodity/raw material prices in the world market are a much bigger threat to the global recovery than the euro debt crisis. It is a silent killer that doesn’t attract screaming headlines.
Energy deficit: Energy deficit is to raw material deficit what revenue deficit is to fiscal deficit. It is a subset of the former but is more constraining and critical in itself.
The Planning Commission’s 12th Plan projections on energy deficit, which are not only optimistic but also restrictive in estimation—it only estimates primary commercial energy deficit—are nearing a crisis level.
Energy deficit in million tonnes (mt) of oil equivalent has been estimated at almost 40% of the commercial energy requirement. It ranges from 25% in coal to 80% in oil.
The pace at which these deficits are increasing is alarming. For instance, the gap in coal has doubled in four years: from 50 mt in 2007-2008 to 115 mt in 2011-12. In view of various regulatory issues in 2011-12, this deficit will undoubtedly be much larger. The estimated all India peak deficit for power which stood at around 10% during 2011, is a clear underestimate in view of the fact that demand is physically kept in check.
Skill deficit: For India’s now fabled demographic dividend to be realized, its yawning skill deficit has to be covered. A number of studies have shown that this year itself India will have a deficit of 5.25 million employable graduates and vocationally trained workforce.
A recent national employability report by an employee assessment service provider has revealed that just less than 18% of technical graduates in the country are ready to be employed. In other words, almost 82% of such graduates are unemployable.
What comes as big surprise is that the proportion of “ready-to-deploy engineers" in the information technology space is dismally low at just 2.68%.
These statistics make the target for skilling of 500 million people almost impossible to achieve. The focus has not only to be on the number, which is humongous in itself, but also on the quality of skills being imparted.
Financial intermediation deficit: A far more serious and structural deficit than fiscal deficit that impairs production in India is the intermediation deficit in the financial sector. There are more than 26 million micro, small and medium enterprises that contribute 10% of the gross domestic product (GDP), nearly half the manufactured output and 40% of exports.
They have no access to equity and get an abysmally low share in debt. These enterprises barely get ₹ 2 trillion as credit from banks. This is less than 2.5% of credit/GDP ratio and not even a tenth of the net bank credit. These enterprises manage their business with just 5% of their annual turnover as working capital and less than 20% of their assets as tenured loans.
Governance deficit: The Union finance minister will do well to identify major capacity deficits in governance practices and institutions and recommend initiatives to address them. The scams have left the system scarred.
The emphasis should be on how the government intends to strengthen the legitimacy and effectiveness of policymaking in areas that are causing a systemic crisis. With the entire system now in the throes of a crisis, it will be a huge booster not just for the markets but everyone to know what is being done to address the spiralling governance deficit. These done, the fiscal deficit along with its associates will take off itself on a sustainable basis.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at email@example.com
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