StatsGuru-25-February-13

The finance minister's balance sheet

When Finance Minister P Chidambaram presents the Budget later this week, he faces some daunting challenges. Most obviously, there is the fiscal deficit. As Table 1 shows, the path of fiscal consolidation was abandoned in 2008, with revenue deficit jumping and the gross fiscal deficit practically doubling in a year as a percentage of gross domestic product. Since then, the government has struggled to bring it down. Part of the reason is visible in Table 2 which shows the revenue side of government finances.

Direct taxes, which had increased steadily as a percentage of GDP over the 2000s, trended downwards. And the sharp downturn in productive activity — associated with cost-push inflation, visible in Table 3 — combined with tax concessions to tide over the recession to ensure that indirect taxes saw a steep fall. Meanwhile, government expenditure continued to be high, as Table 4 shows. Worryingly, while revenue expenditure increased as a percentage of GDP after 2008, aided by a sharp increase in subsidies that the graph also indicates, capital expenditure has gone in the opposite direction.

This indicates the second problem Chidambaram must deal with: The growth slowdown. Government capital expenditure being low, private investment must pick up the slack. But, as Table 5 shows, gross domestic savings have gone sharply down as a percentage of GDP, and gross domestic capital formation, too. At least some of the effects are moderated by the fact that foreign investment, including portfolio investment, has recovered from the shock of the financial crisis, as Table 6 shows. But that could reverse any time. As Table 7 shows, imports have outstripped exports, and the current account deficit is deep in the red. If foreign investment flows, too, were to turn negative, then India would be in a classic crisis. (Click here for tables)