Opinion Downgrade UPA’s fiscal management!

Bibek Debroy<br> Towards the end of February,CSO will disseminate figures for Q3 of 2008-09 and one will know how bad the slowdown really is.

New DelhiFebruary 6, 2009 04:53 PM IST First published on: Feb 6, 2009 at 04:53 PM IST

Not just the Indian economic story,the deficit story is also increasingly turning dismal. Towards the end of February,CSO will disseminate figures for Q3 of 2008-09 and one will know how bad the slowdown really is. And on February 16,the vote on account will tell us how bad the fiscal story is.

There is a Fiscal Responsibility and Budget Management (FRBM) Act,with terminal goals in 2009-10 of a revenue deficit/GDP ratio of 0.0% and fiscal deficit of 3%. The budget estimates for 2008-09 promised a revenue deficit of 0.5% and a fiscal deficit of 2.5%. But this was without providing for items like farmers’ debt relief,Sixth Pay Commission and National Rural Employment Guarantee Act (NREGA). So the budget estimates fudged and on February 16 we will know the Centre’s fiscal deficit is 6.5% of GDP. That’s without including oil and fertilizer bonds,which have adverse effects similar to those of the fiscal deficit. With those off-budget items thrown in,the Centre’s deficit will be 9% of GDP.

And then we have the states. The combined aggregate state deficit is around 2.5% of GDP. But that is a lagged figure,when tax revenue in states was buoyant.

Low growth affects tax revenue. Hence the State deficit will be 3% and the combined deficit will be 12% of GDP. There was little fiscal consolidation and reform under the UPA government. Indeed,reforms are easier when there is growth and buoyant tax revenue,a point Vijay Kelkar also made. Reforms are difficult when there is a downturn. That growth opportunity was missed.

There will be an attempt to find a scapegoat in the external slowdown for the widening in deficits. But that’s not true. The additional fiscal stimulus because of the slowdown doesn’t amount to more than 5% of GDP. The rest of it is due to populist expenditure and the so-called flagship programmes of the UPA.

Twelve per cent is a horrendous figure,unparalleled since 1991. The issue is not the inevitable downgrading of India’s sovereign credit rating,once this becomes public domain information on February 16. More importantly,there was a consensus on fiscal rectitude across every government since 1991. That disappeared under UPA and the incoming government will find it difficult to reverse the trend. Instead,there will be pressures to dilute and relax FRBM,with similar moves in states.

We should downgrade UPA’s fiscal management. Citizens have simply been too kind.