IF HOME Minister L.K. Advani's soft state turned its attention to more mundane matters like the near financial bankruptcy of the Centre and the states, India would be so much better off in terms of its internal security that derives from economic stability.
The ever mounting fiscal deficit of the Centre and the states, now touching 10 per cent of the GDP, is in fact an acute problem of governance, the exclusive plank used by the BJP-led alliance to ride to power in 1998-99.
The fiscal crisis facing the Centre has reached such gargantuan proportions that the soft state finds no other option than to tinker with subsidy on foodgrains given to millions of people below and above the abstract poverty line. Fiscal deficit which is nothing but the total borrowings of the Government to meet its overshooting expenditure is often posed by economists as a technical issue. At least in the Indian case, it is a problem of sheer governance.
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Some examples will illustrate the point. For instance, the soft state tries to shed its image by hiking defence expenditure by a whopping Rs 12,800 crore, but shows no courage to recover cumulative losses of Rs 30,000 crore suffered by electricity boards across the country. It is fairly well established that the bulk of these losses are caused by illegal power connections taken by the well-off sections of the society.
Recently, Power Minister R. Kumaramangalam was asked in a television programme why the states were unable to stop theft of power, largely benefiting the industry, he meekly surrendered saying: What can we do. The Electricity Boards complain to the police and they do not take action. Isn't this a problem of governance? You don't collect dues from people who can pay, and then resort to borrowings to make up for budgetary slippages!
In 1999-2000 alone, the Centre lent to many states in financial distress about Rs 3,000 crore to help them tide over near bankruptcy. In this year's Budget, the Centre has provided another Rs 10,000 crore grant to the states as a special case. This and the Rs 12,800 crore increase in the defence budget has caused a major dent in the Centre's finances in the 2000-2001 Budget. No wonder Finance Minister Yashwant Sinha had to settle for an unduly high fiscal deficit of 5.1 per cent of GDP in the Budget estimates for 2000-2001.
In absolute terms this works out to Rs 1,11,275 crore in the Budget estimate. The fiscal deficit in 1999-2000 is a whopping Rs 1,08,898 crore, a slippage of nearly Rs 30,000 crore from the budget estimate. Indeed, Mr Sinha has created a record of sorts. A quick calculation reveals that in his two Budgets since 1998-99, Mr Sinha has made the Government borrow a total of about Rs 2,22,000 crore. In sharp contrast, the four Budgets preceding 1998-99, had resulted in the Government borrowing a similar amount.
Mr Sinha has achieved another rare distinction. In 1998-99, the revenue deficit of the Centre sharply increased to touch 75 per cent of the fiscal deficit. This is the most serious development in our fiscal management in recent times.
Simply put, revenue deficit is what the Government borrows to meet its current expenditure like salary, interest payment, foreign travel and other administrative expenses. Prior to 1998-99, the revenue deficit of the Centre was less than 50 per cent of the fiscal deficit. This means the Government spent less than 50 per cent of its total borrowings towards current expenditure. In effect, this gave the Government room to spend the rest of its borrowings on the much needed capital expenditure.
But since 1998-99, the bulk of Government borrowings have gone towards keeping a bloated bureaucracy going. This is almost like a household borrowing every month from a bank to spend the bulk of it on rent, grocery, transport and so on.
This is nothing short of a disaster. In his Parliament address, the Finance Minister joked that the Indian housewife had a much more difficult job budgeting her expenses than he did. Surely, no housewife can afford to borrow every month and spend the bulk of it on current expenditure.
At a more macro-level, Mr Sinha has gathered courage to run up such high fiscal deficits consistently because some of his esteemed advisors may have told him that the traditionally perceived ill-effects of excessive Government borrowings are nowhere in sight. The twin dangers of excessive Government borrowing are increase in interest rate in the economy and a building up of inflationary potential. Since both these haven't happened in the last two years, there is a palpable sense of complacency among policy makers.
But behaviour of the economy at the ground level has given rude surprises to policy makers in the past. Interest rates could tighten again as aggregate demand in the economy picks up and corporates rush to the banks seeking more funds to invest in additional capacity. Inflation could also come back with a vengeance if there is an upturn in world commodity prices.
You just have to look at the way the Prime Minister's Office is already getting worried about the skyrocketing world oil prices. If a similar thing were to happen in the commodity sector, then the proponents of high fiscal deficit will run for cover. It will be too late then to take any corrective action. The problem of governance may then get even further compounded for the soft state.