Opinion The frightening fisc
A fiscal disaster looms. The govt believes we wont pay for our profligacy
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I am not sure if this sounds scary. Certainly,the government doesnt seem to acknowledge the enormity of the situation. But dark clouds seem to be gathering around India as its economy just about manages to wriggle out of a roller-coaster 2011. There isnt one particular factor that threatens to test the crisis management skills of Manmohan Singhs government. An interplay of several domestic factors and exogenous variables has started worrying many New York analysts tracking India. So far,this worry has manifest itself in the equity markets. A top-notch hedge fund manager,who was in India recently to study the situation on the ground and meet those at the helm of policy-making,said: The equity market is like the public urinal. You eat and drink all kind of stuff. The distilled (sic) output that you get reflects the health of the economy.
The Sensex (it is the Bombay Stock Exchanges 30-scrip benchmark index) has plummeted over 25 per cent this year. It closed at 15,379 on Monday compared with 20,561 on January 3,the first day of trading this year. But I would prefer to look at the more broad-based BSE 500 index. It has lost more than a third,37.6 per cent to be precise,in free float market capitalisation till date this calendar year. Free float refers to shareholding that does not include promoter stock and stock that is locked-in,and is a true indicator of investor loss. In money terms,investor wealth has seen an erosion of a whopping Rs 13.2 lakh crore.
What are these dark clouds?
A fiscal disaster is clearly brewing. Finance Minister Pranab Mukherjee has acknowledged he will not be able to meet the deficit target of 4.6 per cent of the gross domestic product (GDP) in 2010-11. Conservative estimates suggest he will overshoot it by at least one percentage point. He has already breached his expenditure target by Rs 55,000 crore so far this fiscal. A mere 3 per cent increase in total spend that was originally budgeted for does not leave much scope for handsome savings. On the contrary,high global crude oil prices have only queered the fiscal pitch,requiring the government to set aside higher oil and fertiliser subsidies. Further,a slowing economy means lower tax collections. The top 100 companies advance tax payments due on December 15 have remained flat. Besides,a falling market has lent itself to postponing stake sales in public sector undertakings. The only innovation the government has so far brought to the table is to ask cash-rich PSUs to buy stock of other PSUs and shell out hefty dividends. There is no more magic Mukherjee can pull out of his hat now. As it is,the government did not completely exit from the fiscal stimulus it imparted to the economy over the last two years. It also frittered away last years windfall gains from the auction of telecom spectrum.
While this may be so,what is spooking analysts is the extraordinary burden the governments new and proposed entitlements food security and health for all will put on the exchequer in the coming year(s). Foreign investors who have a bouquet of options to consider are not sure if the Congresss top leaders Sonia and Rahul Gandhi have a clear view on how these big-ticket expenditure items will be funded. India is a big,growing economy,but for global investors,there are compelling alternatives in Vietnam,Mexico,Brazil and Indonesia. Nobody is saying this expenditure is not worthwhile; India should have thought about it decades ago. But then,how do you pay for all this? Especially when there is little or no change on the other side of the economy reforms in the real sector. The lopsided balance creating entitlements without resources to pay for will take its toll somewhere.
Government managers are defensive. The standard argument is that India is different since the Central and state government debt is almost entirely internal. We do not yet have an India bond subscribed by outsiders. This is perhaps one reason why there is an outrage whenever a credit-rating agency has unkind words for India. But this argument does not hold much water. See what happened to Greece. Its debt was also internal,or largely held by France,Germany,the UK,Italy or Spain,which they thought was backed by a strong eurozone currency. Notably,non-Europeans held less than 10 per cent of the debt. But it did not take long for Greece to get real about its fiscal profligacy. Ditto with Italy,Spain and now France. In other words,what the government is saying is that we will not pay for our fiscal profligacy. But then,someone pays.
Who? Of course,the private sector. Huge borrowings by the government,together with the central banks inflation battle,have escalated the cost of borrowing for India Inc. Worse,we do not know for sure if these rates are for real. Most likely,they would be higher but for a perverse kind of financial repression we have fostered banks,insurance companies and the Employees Provident Fund have to,by fiat,put a large part of their moneys in government securities. The net result is that the private sector has been very badly pushed out of the credit market.
Fisc is certainly a big dark cloud lurking over the near horizon. But it is not just the fisc. A sharply depreciating rupee that can touch 60 to a dollar,continuing policy flux,populist measures ahead of state elections,a deteriorating eurozone with substantial exposure to India,and a simmering liquidity crisis,are akin to concentric dark circles around the fiscal cloud. On top of all this,there are demands to cut interest rates at a time when inflationary pressures are nowhere near the comfort zone. Surely,crisis managers will not come to the fore only when the crisis blows up in their face.
pv.iyer@expressindia.com
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