Fiscal prudence is not always a virtue but too much sinning is bad.
The Greeks have a God for prosperity and wealth, Ploutos, but not one for economic and fiscal management. No wonder Greece’s distressed Prime Minister George Papandreou flew down to New Delhi to genuflect before our own deity for economic crisis management — India’s turnaround man, Prime Minister Manmohan Singh.
Mr Papandreou then sat down for a confessional with the media. “Clientelism and patronage and the wasting of money on political favours,” said the visiting premier, had contributed to the collapse of “the sense of rule of law” in the financial system in Greece. Corruption, in his predecessor’s regime, said Mr Papandreou, had contributed to an unsustainable deficit in the government’s finances and to the crisis staring Greece in the face.
Corruption can contribute to budgetary deficits in many ways. The tolerance of tax evasion, political favouritism in unwarranted public spending and subsidy regimes can all contribute to enduring deficits. In India, the fertiliser and petroleum subsidies offer examples of two different kinds of corruption contributing to budgetary deficits.
The fertiliser subsidy benefits business interests in the fertiliser industry who are happy to keep politicians in power happy. The petroleum subsidy is a manifestation of a corruption of a different kind — it is a bribe to consumers who are unwilling to pay the economic price of fuel, energy and, as it happens, water.
Burgeoning deficits, therefore, are a manifestation of different types of corruption in public life. A balanced budget becomes, by definition, a sort of public virtue. Economists are a divided lot on the virtues of fiscal prudence. Keynesians question the view that what is good for the individual, living within one’s means, is good for the whole. The fallacy of composition. Prudence is a virtue for households, not necessarily for the governments.
It is interesting to see how often words like prudence and virtue turn up in the discourse on deficits! A former High Priestess of the International Monetary Fund (IMF), Anne O Kreuger, made bold to deliver a lecture on fiscal policy in New Delhi a few years ago that she titled “The Rewards of Virtue”. (Read at: http://imf.org/external/np/speeches/2004/011604.htm).
In the post-Lehmann world of 2008-09, finance ministers around the world consensually committed the sin of fiscal imprudence, forsaking fiscal virtues by invoking the ghost of John Maynard Keynes. Even the IMF chose to sup with the devil.
All that is now behind us. The week of sinning is over, says the IMF, Sabbath has come and it’s time to go to church, confess and get back to dull and boring balanced budgets.
Time was when such a message from the Fund, after its Article IV consultations, made it to the front pages of the Indian financial media. Last week, all of us buried the story inside. Pity Kalpana Kochhar of the IMF. Her predecessors, of the early to mid-1990s, made waves in the Indian media with statements like hers that were viewed as admonishments in a prickly India. Today, few bother.
It is a measure of the decline in the IMF’s influence that her “time-to-unwind-the-fiscal-stimulus” summing up of the IMF’s review of India didn’t get the play it deserved even in a media that has been asking the “when” question without let in the past few weeks. Each time finance minister Pranab Mukherjee has been asked “when”, he turns all coy and shy as if he were being asked out on a date. And, just in case anyone got the wrong idea, he would proffer the tame reply, “when the time comes”.
But Dr Kochhar, deputy director of the Fund’s Asia and Pacific Department, has been more forthright than most, as she can surely afford to be. “We do believe it is time to unwind the stimulus measures that were put in place last year,” she said without fear or favour. It is not just my chivalry but also my economics that compels me to agree with the lady at the Fund.
A fiscal deficit to national income ratio of 6.8 per cent is a sign of low morals and suspect virtue, and a revenue deficit of close to 5.0 per cent of GDP is simply unacceptable. After a decade of staying in single digits, the combined fiscal deficit of the Central and state governments is in double digits. Virtue in the case of revenue deficits is on the side of the states, but they too will now sin walking in the footsteps of the Centre.
Much has been said about the trade-off between growth and inflation in recent weeks. There is also a trade-off between growth and debt burden. Getting the fiscal numbers right is essential to the management of both inflation and internal debt. A former deputy governor of the Reserve Bank of India, SS Tarapore, has recently reminded us that India’s domestic debt to GDP ratio, if all forms of fiscal deficit are accounted for, is no different from that of Greece! With a domestic debt to GDP ratio of 90 per cent, Greece is praying to any God who will listen. India has more Gods and more worshippers, but it is better not to sin more than what the Gods can forgive.
The prime minister’s Economic Advisory Council (EAC) took a contrarian view on the relationship between recent fiscal deterioration and the fiscal stimulus when it said last year (Economic Outlook for 2009-10, October 2009): “The increase in deficits in the revised estimate over the budget estimate did not occur due to the stimulus package but on account of additional outlay on subsidies, pay revision, loan waiver, financing the increased coverage of the NREGA (rural employment guarantee programme), etc.” The EAC summed up its thinking by stating that “it is important to return to the path of fiscal rectitude at the earliest”.
Rectitude?! Synonyms include righteousness, morality, correctness, decency, integrity, uprightness. Fiscal responsibility has become a morality tale. Surely, the fiscally prudent must think all Gods, Greek and Indian, will punish all sinners who are unwilling to be fiscally virtuous! Amen!
