There has been a sea change in the economic environment during the last three months. When the Union Finance Minister presented the Budget, there was buoyancy all around with the economy estimated to grow almost at 9 per cent and the inflation rate was still not a concern though food prices were in the uncomfortable zone. It was hoped that a better monsoon would take care of the food situation. Indeed, some of us had cautioned that off Budget liabilities could spoil the party, and in these columns I had speculated that these could add up to 2 per cent of GDP (BS, March 4). However, within three months, the optimism has given way to apprehension, if not despondency. Capital inflows have slowed, and, in fact, the last few weeks have seen significant outflows. The wholesale price index has climbed to 11.42 per cent during the week ended June 27, and is not likely to go down in the near term. The Indian rupee is one of the few currencies depreciating against the US dollar. Although the Finance Minister has stated that the prices will stabilise in three months, there are suspicions that the problem is deep-rooted. Growth forecasts are being revised downwards and the problem seems to last much longer than anticipated. The manufacturing sector is likely to grow at a much slower rate due to increase in interest costs and slackening world demand and even the service sector will not exhibit the past buoyancy.
The major factor spoiling the party is surely the sharp surge in crude oil prices. In my last column (Business Standard, June 3), I had cautioned that increasing oil prices will create a serious problem that could plunge the country into a fiscal crisis. Immediate and drastic measures were necessary. Instead, the government chose to effect marginal increases in prices of petroleum by Rs 5 per litre, diesel by Rs 3 per litre, and cooking gas by Rs 50 per cylinder. Many state governments substantially neutralised this by reducing their sales tax rates. This demonstrates that first, we are unwilling to insulate pure market decisions from political vagaries, and second, we do not really care for allocative consequences of our pricing decisions.
An important fallout of the increasing crude oil prices is the sharp rise in unfunded liabilities. In a recent article Shankar Acharya (Business Standard, June 26) alluded to the darkening sky in the Indian economic scene. In his view increase in the prices of fuel, food and fertilisers has created an additional fiscal burden and he estimates the total deficit at the Centre relative to GDP at 6-7 per cent and aggregate fiscal deficit at 9-10 per cent. Similarly, Standard and Poor's estimates that the total fiscal liabilities of the Central government could be as high as 6.2 per cent of GDP and, together with states, the liabilities could work out to 8.7 per cent. My own assessment is that unfunded liabilities are much more. If the crude oil prices remain at $140 per barrel, the projected under-realisation is estimated at Rs 3,00,000 crore. The recent increase in prices is estimated to realise about Rs 21,000 crore. The increased realisation from duty cuts will commensurately reduce revenue from customs and excise and will not alter the deficit. Asking the oil-exploring and -marketing companies to bear a part of the increase will result in lower realisation of revenues from corporation tax and dividends. Even if the recent price increases and absorption by oil-extracting and -marketing companies are assumed to generate a net amount of Rs 50,000 crore, we are left with unfunded liabilities amounting to Rs 2,50,000 crore. This works out to 5.5 per cent of GDP. Along with an under-budgeted subsidy amount of 2 per cent of GDP and food subsidy of about 1 per cent, we have off budget liabilities amounting to 8.l5 per cent of GDP. To this we have to add the additional liability arising from pay revision and loan waiver.
As stated by Martin Feldstein, "Fiscal deficits are like obesity. You can see your weight rising
