Deficit is no demon
It was the season of budgets a fortnight ago. While the Union Government presented its interim budget on February 1, the Kerala State Government came out with its budget proposals a day before in the Assembly.
For the lay person, the budget conjures up a maze of figures and statistics with comments from economists, businessmen, entrepreneurs and policymakers on whether the budget will be good for the country or not.
What constitutes a ‘good’ budget is a question that is not easily answered. In fact, it could well be a moot point whether government budgets make any difference at all in the lives of ordinary people. So, apart from rarefied discussions on ‘fiscal’ deficit and ‘revenue’ deficit, the deficit to GDP percentage and so on, what is one to make of this annual spectacle?
While Article 112 of our Constitution mandates that “the President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year”, Article 202 mandates the Governor of the State to do the same thing.
Thus the budget is just an income and expenditure statement of the Government for the next financial year, which starts from April 1. The budget projects the cash inflows and outflows of the Central and State Governments through the Consolidated Fund which is the main account for Governmental transactions.
Catering to needs
Governments are expected to provide public services and goods to the citizens so that, primarily they have the guarantee of law and order, peaceful living and over a period, their standard of living improves. Towards this end, Governments will spend money on provision of utilities such as drinking water, sanitation, roads and street lighting, broadly categorized as physical infrastructure necessary for any nation-State and social infrastructure like educational institutions and hospitals.
It is also the duty of the Government to ensure that the minimum needs of all the citizens regarding food, clothing and shelter are met. In a country like India, with a population of close to 1.3 billion, poverty eradication is a major goal of governance.
One of the basic measures of the success of budgeting income and expenditures of the Government would be to assess how the Indian State has succeeded in reducing poverty over the years. The following table is a pointer to our progress in this regard:
National poverty estimates (% below poverty line) during 1993-94 to 2011-12
Year Rural (%) Urban (%) Total (%)
1993 – 94 50.1 31.8 45.3
2004 – 05 41.8 25.7 37.2
2009 – 10 33.8 20.9 29.8
2011 – 12 25.7 13.7 21.9
(Source: Poverty Estimates, 2011 – 12, Planning Commission)
Based on the Suresh Tendulkar Committee recommendations, the poverty line in rural areas was stipulated at Rs. 27 and Rs. 33 in urban areas, estimated to be enough to pay for two meals a day. Another Committee, headed by former RBI Governor and economist, Dr. R. Rangarajan, had modified the poverty line mark at Rs 32 and Rs 47 for rural and urban areas respectively.
One can very well imagine the plight of people who live below these income levels. India cannot claim any greatness, whether of the past or the present, unless all its citizens have enough to eat, clothe themselves and have a roof over their head.
Here’s where the focus of the budget becomes important. How much of the resources of the Government go towards poverty alleviation and development is a major marker of the orientation and the relative effectiveness of a budget.
It is a fact that governments both at the Centre and the States have run into issues regularly arising out of their expenditure staying above the income. It is wrong from an economic perspective to compare a household budget with that of a Government as the latter are sovereign entities, with an enduring existence under normal circumstances.
Borrowings by the Government are not to be seen with the same lens that we use to analyse household expenditures. Governments do not always need to have a balanced budget. In fact, many countries run in deficit mode indefinitely. Britain has maintained a national debt for more than 300 years. The US has been in continuous deficit except for seven short periods.
The Government budgetary deficits are not intrinsically bad. Indeed, they can be very helpful to an economy. Spending more when the private sector is flagging is a necessary function of government. Deficit spending -- through tax cuts or the purchase of goods and services by the government -- can help turn an economy around.
Economists such as Paul Krugman and Joseph Stiglitz have argued that while consumers on a spending spree ultimately have to pay up, a government’s borrowing strategy directly affects economic growth and this could deliver social benefits.
The most important factor discussed in the recent discussions on the Indian budget whether of the Centre or the State has been on the issue of deficits. As per an Act of Parliament (The Fiscal Responsibility and Budget Management Act of 2003) the fiscal deficit of State and Central governments must be not more than 3% of GDP, with the target date recently amended to extend up to March 2021.
Credit rating issue
The obsession with sticking to this norm of deficit arises from the worry that international credit rating agencies may downgrade India’s rating if the deficit continues to be high. In my view, this has led to a stance of ‘fiscal fundamentalism’ of sorts which may not be the correct policy to follow for a country like India whose domestic saving rate is high and 80% of the Government’s debt is internally owed (not external) unlike most of the developed countries.
The external debt to GDP ratio of our country stood at 20.5 per cent at the end of March 2018, marginally higher than its level of 20.0 per cent at end-March 2017. All of Europe, the UK, the US and Japan have external debt much higher than these levels. Indeed, the composition of our debt being local is a major saving grace for India and this needs to be factored in upfront while discussing the problem of fiscal deficits.
Budgets would be par for the course if only money is spent and utilized properly for the purposes announced at the time of the presentation of the Financial Statements to the Legislatures, both at the Centre and States. A deficit by itself is not to be damned.
* The views expressed are personal