Photo: Mint
Photo: Mint

Opinion | The blot in the NDA’s hitherto prudent fiscal copybook

If this government returns to office, it has to own up and clean up macroeconomic statistics

No matter what one thinks of the United Progressive Alliance (UPA) government, one has to concede that it was consistent throughout. It was fiscally profligate in both its first and second terms. In contrast, the National Democratic Alliance (NDA) government has been inconsistent in its behaviour. It was fiscally prudent in its first three years. It inherited an impossible fiscal retrenchment target and it reduced the (true) fiscal deficit from around 6% of gross domestic product (GDP) to 4.1% and below. The oil price crash of 2014-16 came to its rescue, of course. However, in the last two years—2017-18 and 2018-19—it has undoubtedly botched up its copybook and has a lot to answer for.

Governments finance their fiscal spending and deficit usually through market borrowings. Printing money to finance the fiscal deficit is out of fashion except in Europe and in America.

Governments in India have another resource. They borrow from the accumulated deposits in their small savings schemes. The NDA government has discovered a third source. That is, internal and extra budgetary resources of public enterprises. It has used internal and extra budgetary resources in two ways.

Instead of paying the subsidies it has to, it has forced some of the enterprises to borrow to fund their operations. Two, it has pushed some of its own borrowing on to their books so that, on paper, the government would appear fiscally prudent.

During the UPA years (March 2004-March 2014), net borrowings of the Union government from the market and from small savings together went up five times or at a compounded annual growth rate of 18%. If one counted from 2005, the compounded annual growth rate is 29.3%.

In contrast, for the NDA government, this figure has actually contracted. That is, the combined sum of net market borrowings and from the small savings schemes is now estimated at 4.28 trillion. In the year ended March 2014, the amount was 4.66 trillion. The amount has contracted by 8.2% in five years (CAGR of -1.7%). That looks like extraordinary fiscal prudence. But the moment one adds internal and extra budgetary resources of public enterprises to the above numbers, the NDA’s fiscal rectitude in the last two years looks less stellar.

In the first three years of the NDA government, the combined borrowing of the entire public sector (the Union government’s net market borrowing, borrowings from small savings schemes and internal and extra budgetary resources of public enterprises) went up only by 3.6%. The annual growth rate was around 1.2%.

But in the last two years, the government had pushed much of its borrowing on to the books of public enterprises. In the last two years, this amount has jumped from 7.55 trillion to 10.72 trillion, based on the revised estimates for 2018-19. This may be a lot higher in the end, if one went by the experience in 2017-18.

In 2017-18, the government budgeted internal and extra budgetary resources of 3.85 trillion. The revised estimate was 4.77 trillion. But the actual figure turned out to be 6.11 trillion.

Similarly, for the year ending March 2019, the government had budgeted internal and extra budgetary resources of public enterprises at 4.78 trillion. It has now been revised to 6.44 trillion. The final figure could be higher. If these are debts assumed by public enterprises because the government did not or could not finance them through the budget, or if they are necessitated by the failure of the government to pay its subsidies to the public enterprises, then they amount to a significant understatement of the deficit.

This situation has come about because of slower growth in the last two years. But economic growth numbers do not tell that story. Despite modest overall and bank credit growth, the government has reported an estimated economic growth rate of 8.2% for 2016-17, and 7.2% for 2017-18 and for 2018-19. At the same time, the Central Statistics Office (CSO) had cut the growth rates for the period from 2004 to 2012 when credit growth was much higher. Further, the CSO reports robust fixed capital formation in the private non-financial sector even as its profit share of GDP has been cut in half between 2008 and 2018. The storyline that India has the world’s fastest growth among large economies does not really stand up to rigorous scrutiny. Worse, that has compounded the fiscal deficit maths.

In spite of these shenanigans, the government has been lucky. The rise in the price of crude oil seen in 2018 has been arrested and a pusillanimous Federal Reserve has thrown a lifeline to emerging market currencies and global liquidity.

If this government returns to office in May, it has to own up and clean up not just the budget numbers, but macroeconomic statistics. That will enhance its and the nation’s credibility and help maintain the sovereign credit rating. The bond market may deliver the verdict on that prospect in the next few weeks.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are his personal views