OPINION
DEFICIT FINANCE Vs POPULIST MEASURES
Will FM take the call?
Historically, budgeting process in India has been treated as a secret affair for no apparent cogent reasons, though such an exercise in most of the Western world is devoid of any shroud of confidentiality. For common man, Indian budget of the government of India is synonymous with tax provisions both direct and indirect. However, there are a few aspects in a budget which affects both the macro and micro phases of national life, which also need to be given due consideration. Deficit financing obviously is one such phenomenon which has far reaching implications for the national economy in general and individual lives in particular.
Defining deficit financing, applicable to all countries at all times is not feasible, though Indian planning commission explains it as equal to the net increase in the purchasing power of the economy arising out of the budgetary operation of the government. Deficit financing is taken as a recourse, whenever, government expenditure exceeds the receipts from the public like taxes, borrowings from the public or fees etc. In such a scenario, till the 1990s government used to print the currency notes to fill the gap. However, since 1997, such practice was replaced by ways and means advance by the Reserve Bank both to the central and state governments. Thus, deficit financing is the actual net credit given to the government sector by the Reserve Bank. In effect, when current expenditure exceeds current revenue government opts for deficit financing.
In a developing country like India deficit financing must be used as an instrument of economic development. In Keynsian "theory of employment" it means to secure full employment, through providing capital. Because, in India due to low levels of income and high propensity to consume, aggregate savings are low, resulting in inadequate investment and lower production. In the circumstances, deficit financing meets the shortage, by creating of new money supply which in turn enhances investments, production and also effective demand to accelerate development process. In India, deficit financing also enables building up of social and economic overheads, increasing employment opportunities and helps to create additional resources.
However, government of India while determining the target for deficit budget in 2012 – 2013, must be conscious that its target of 4.5% of GDP may end up with 6.5% deficit for financial year 2011 – 2012. It must also take precautions that deficit financing is prescribed at moderate doses; take steps to control prices of consumer goods and services; concentrate on quick – yielding projects; food prices must be kept low by imports whenever necessary or inevitable; rise in wages and salaries should be checked lest country may fall into the dangers of vicious cycle; monetary policies are opted by the RBI appropriately to withdraw the excess purchasing power, the excess money supply (though RBI has miserably failed to control the high prices and inflation spiral, despite of hiking of bank rate more than a dozen times in 2011). Failure on the part of government and RBI during 2011 – 12 to control price and inflation is primarily attributed to deficit financing resulting in increased money supply with the public, rise in the level of income reduced production of goods and services and the price level.
Therefore, to minimize the impact of increased dose of deficit financing, budget 2012 – 13 must contemplate measures such as anti – inflationary fiscal and monetary policies, economic controls, proper allocation of resources and developing import surplus. At the sametime, such policies and fiscal implications of ways and means advances must usher into an era of stability in the economy, which is conducive in the long run to enthuse increased savings, enhanced investments, more exports and stable external value of Indian rupee. This calls for fiscal self – discipline on the part of both the centre and states.
Government, must also constantly attune its policies to cut deficits aggressively so as to be conducive to save the productive sectors in the economy. In the recent past, there has been sharp decline in the private investment and simultaneously fiscal deficit has risen beyond the tolerable dimension, because government policies have been more politicalised to invest in unproductive social ventures like NAREGA which ultimately went down the drain due to corruption a – la U.P pattern. Yet, government failed to cut the national deficit which is around 9.5% at present causing inflationary spiral. Low – cost capital, as a result, vanished in the private sector for investment.
It must be noted while formulating the 2012 – 13 budget that the national fiscal deficit (both central and state) including off – budget spending increased from 4.8% of GDP in 2008 to 10% in 2009 and is likely to be much higher in 2012. The government also failed to limit its unproductive non – plan and revenue expenditures due to excess staff, increased subsidies to fertilizer, food, oil and other spheres. The subsidy psychology politicalised, discouraged farming sectors and bad governance at all levels. Subsidies also encouraged to consume more food without corresponding increase in food production. Even disinvestment proceeds out of 2G and 3G licenses did not help to reduce the fiscal deficits which exceeds Rs.1,00,000 crores in 2012. Further, deficits further increased due to revenue loss arising out of duty on import of petroleum products, slowdown in tax collection due to inadequate tax management, failure of government to disinvest the loss making public sector units as contemplated in the 2011 – 12 budgets. Therefore, at a time when the national consolidated fiscal deficit in 2012 is likely to be around 10.5% of GDP, there is an imperative need for the government to reduce its revenue expenditure on establishments and curtail the subsidies. Because, it goes without saying that increasing fiscal deficit burden may directly affect the future growth pattern.
Therefore, it is imperative that 2012 – 13 budget must suggest steps to ensure to cut non - interest revenue expenditure through expenditure reform policies. Privatization of PSUs must be expedited so as to reduce debt burden of the government. However, if the government fails to entail its budgetary provisions related to fiscal deficits into the framework of growth potentials. India may fail to contain inflation and prices, affecting the standard of living of common people. In order to reduce the extent of deficit financing investment prospects by overseas investors including NRIs in spheres like wholesale retailing must be encouraged. It is also imperative that in order to secure fiscal consolidation, the government should target a zero revenue deficit as against 6% at present and reign in national fiscal deficit at 6% as against 9.5% in 2012. At a time when India plans to borrow upto Rs.500 billion ($9.5b) by pledging property and shares to bridge the governments deficit budget in 2012, reducing the fiscal deficit for 2012 – 13 shall remain a big challenge for the FM while presenting his budget in March 2012. Regretfully, cutting the deficit as a function has become more of politics rather than real public finance instrument. Hence, the impending budget must face the challenge to reconfigure spending away from subsidies to growth – boosting investments, if the objective is to reach a growth rate of 9 to 10% during 2012 – 14. This is more imperative at a time when the country has been confronted with economic slowdown, sluggish revenues and rising subsidies. The government estimated that it would procure Rs.40,000cr out of disinvestment did not materialize. Spectrum auction may not materialize. On the contrary, it may have to bear additional expenditure of Rs.45,000 crores towards fuel subsidy due to increasing global pricing enlarging the quantum of deficit.
Therefore, in order government must reduce its public debt – GDP ratio; fiscal discipline must be imposed with an iron hand in terms of Fiscal responsibility and Budget management Act. Fiscal deficit must be brought down to 3 to 3.5% during 2012 – 13. Whereas Keynsian solution is welcome for a country like India, fiscal profligacy shall defeat the very purpose.
In the circumstances, to restrain the deficit financing to the minimum in the budget 2012 – 13, F.M. must enhance plan outlay for social and rural infrastructural sector; all out efforts must be made to improve agriculture output, cutting wastages, increasing food processing, instead of merely raising of budgetary allocations. Funds flow to rural India must help to improve consumption related productive sectors. Finance minister, must also imbibe into the budget credible fiscal consolidation process; reducing subsidies in oil sector, rationalizing excise duties, improving better tax collection management so as to improve the productivity and total receipts, thus helping to bring down the deficit. But, it warrants bold decisions based on fiscal prudence rather than political exigencies on the part of the national exchequer when he presents his budget 2012 – 13, in mid March 2012. Will he or will he not?
Author is Former General Manager of Vijaya BanK.
Will FM take the call?
Historically, budgeting process in India has been treated as a secret affair for no apparent cogent reasons, though such an exercise in most of the Western world is devoid of any shroud of confidentiality. For common man, Indian budget of the government of India is synonymous with tax provisions both direct and indirect. However, there are a few aspects in a budget which affects both the macro and micro phases of national life, which also need to be given due consideration. Deficit financing obviously is one such phenomenon which has far reaching implications for the national economy in general and individual lives in particular.
Defining deficit financing, applicable to all countries at all times is not feasible, though Indian planning commission explains it as equal to the net increase in the purchasing power of the economy arising out of the budgetary operation of the government. Deficit financing is taken as a recourse, whenever, government expenditure exceeds the receipts from the public like taxes, borrowings from the public or fees etc. In such a scenario, till the 1990s government used to print the currency notes to fill the gap. However, since 1997, such practice was replaced by ways and means advance by the Reserve Bank both to the central and state governments. Thus, deficit financing is the actual net credit given to the government sector by the Reserve Bank. In effect, when current expenditure exceeds current revenue government opts for deficit financing.
In a developing country like India deficit financing must be used as an instrument of economic development. In Keynsian "theory of employment" it means to secure full employment, through providing capital. Because, in India due to low levels of income and high propensity to consume, aggregate savings are low, resulting in inadequate investment and lower production. In the circumstances, deficit financing meets the shortage, by creating of new money supply which in turn enhances investments, production and also effective demand to accelerate development process. In India, deficit financing also enables building up of social and economic overheads, increasing employment opportunities and helps to create additional resources.
However, government of India while determining the target for deficit budget in 2012 – 2013, must be conscious that its target of 4.5% of GDP may end up with 6.5% deficit for financial year 2011 – 2012. It must also take precautions that deficit financing is prescribed at moderate doses; take steps to control prices of consumer goods and services; concentrate on quick – yielding projects; food prices must be kept low by imports whenever necessary or inevitable; rise in wages and salaries should be checked lest country may fall into the dangers of vicious cycle; monetary policies are opted by the RBI appropriately to withdraw the excess purchasing power, the excess money supply (though RBI has miserably failed to control the high prices and inflation spiral, despite of hiking of bank rate more than a dozen times in 2011). Failure on the part of government and RBI during 2011 – 12 to control price and inflation is primarily attributed to deficit financing resulting in increased money supply with the public, rise in the level of income reduced production of goods and services and the price level.
Therefore, to minimize the impact of increased dose of deficit financing, budget 2012 – 13 must contemplate measures such as anti – inflationary fiscal and monetary policies, economic controls, proper allocation of resources and developing import surplus. At the sametime, such policies and fiscal implications of ways and means advances must usher into an era of stability in the economy, which is conducive in the long run to enthuse increased savings, enhanced investments, more exports and stable external value of Indian rupee. This calls for fiscal self – discipline on the part of both the centre and states.
Government, must also constantly attune its policies to cut deficits aggressively so as to be conducive to save the productive sectors in the economy. In the recent past, there has been sharp decline in the private investment and simultaneously fiscal deficit has risen beyond the tolerable dimension, because government policies have been more politicalised to invest in unproductive social ventures like NAREGA which ultimately went down the drain due to corruption a – la U.P pattern. Yet, government failed to cut the national deficit which is around 9.5% at present causing inflationary spiral. Low – cost capital, as a result, vanished in the private sector for investment.
It must be noted while formulating the 2012 – 13 budget that the national fiscal deficit (both central and state) including off – budget spending increased from 4.8% of GDP in 2008 to 10% in 2009 and is likely to be much higher in 2012. The government also failed to limit its unproductive non – plan and revenue expenditures due to excess staff, increased subsidies to fertilizer, food, oil and other spheres. The subsidy psychology politicalised, discouraged farming sectors and bad governance at all levels. Subsidies also encouraged to consume more food without corresponding increase in food production. Even disinvestment proceeds out of 2G and 3G licenses did not help to reduce the fiscal deficits which exceeds Rs.1,00,000 crores in 2012. Further, deficits further increased due to revenue loss arising out of duty on import of petroleum products, slowdown in tax collection due to inadequate tax management, failure of government to disinvest the loss making public sector units as contemplated in the 2011 – 12 budgets. Therefore, at a time when the national consolidated fiscal deficit in 2012 is likely to be around 10.5% of GDP, there is an imperative need for the government to reduce its revenue expenditure on establishments and curtail the subsidies. Because, it goes without saying that increasing fiscal deficit burden may directly affect the future growth pattern.
Therefore, it is imperative that 2012 – 13 budget must suggest steps to ensure to cut non - interest revenue expenditure through expenditure reform policies. Privatization of PSUs must be expedited so as to reduce debt burden of the government. However, if the government fails to entail its budgetary provisions related to fiscal deficits into the framework of growth potentials. India may fail to contain inflation and prices, affecting the standard of living of common people. In order to reduce the extent of deficit financing investment prospects by overseas investors including NRIs in spheres like wholesale retailing must be encouraged. It is also imperative that in order to secure fiscal consolidation, the government should target a zero revenue deficit as against 6% at present and reign in national fiscal deficit at 6% as against 9.5% in 2012. At a time when India plans to borrow upto Rs.500 billion ($9.5b) by pledging property and shares to bridge the governments deficit budget in 2012, reducing the fiscal deficit for 2012 – 13 shall remain a big challenge for the FM while presenting his budget in March 2012. Regretfully, cutting the deficit as a function has become more of politics rather than real public finance instrument. Hence, the impending budget must face the challenge to reconfigure spending away from subsidies to growth – boosting investments, if the objective is to reach a growth rate of 9 to 10% during 2012 – 14. This is more imperative at a time when the country has been confronted with economic slowdown, sluggish revenues and rising subsidies. The government estimated that it would procure Rs.40,000cr out of disinvestment did not materialize. Spectrum auction may not materialize. On the contrary, it may have to bear additional expenditure of Rs.45,000 crores towards fuel subsidy due to increasing global pricing enlarging the quantum of deficit.
Therefore, in order government must reduce its public debt – GDP ratio; fiscal discipline must be imposed with an iron hand in terms of Fiscal responsibility and Budget management Act. Fiscal deficit must be brought down to 3 to 3.5% during 2012 – 13. Whereas Keynsian solution is welcome for a country like India, fiscal profligacy shall defeat the very purpose.
In the circumstances, to restrain the deficit financing to the minimum in the budget 2012 – 13, F.M. must enhance plan outlay for social and rural infrastructural sector; all out efforts must be made to improve agriculture output, cutting wastages, increasing food processing, instead of merely raising of budgetary allocations. Funds flow to rural India must help to improve consumption related productive sectors. Finance minister, must also imbibe into the budget credible fiscal consolidation process; reducing subsidies in oil sector, rationalizing excise duties, improving better tax collection management so as to improve the productivity and total receipts, thus helping to bring down the deficit. But, it warrants bold decisions based on fiscal prudence rather than political exigencies on the part of the national exchequer when he presents his budget 2012 – 13, in mid March 2012. Will he or will he not?
Author is Former General Manager of Vijaya BanK.
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