In the first flush of his 2016-17 budget speech, Finance Minister Arun Jaitley said a couple of very important things. First, not that you maintain your fiscal deficit but you maintain the quality of fiscal deficit. Second, 2015-16 has helped him to establish credibility of this government that, after ages, revised estimates are higher than budget estimates. "We have spent more, we have earned more and we have maintained the fiscal deficit target of 3.9% of GDP and, therefore, we have maintained the quality of fiscal deficit. So, the BJP after last year's pause button reworked its arithmetic benefiting enormously from ever lowering crude oil prices and maintained fiscal discipline this year. Spending more and at the same time earning even more remains the mantra as large dollops of investment into alleviating rural distress in this year's budget may well extricate Bharat from the blue funk that it finds itself in over the last couple of years due to two successive droughts". For 2016-17, the finance minister is hoping to maintain the fiscal deficit at 3.5 per cent of GDP without compromising on expenditure. He hopes to do this by keeping the 7th Pay Commission and OROP offline, which will be an enviable task. The UPA when under the cosh decided to cut back on spending and as such was able to maintain fiscal deficit targets, that was bad economics for a growing economy which relied on government expenditure.
The profligacy of 10 years of UPA's welfare economics hurt India's fiscal deficit and despite the enactment and commitment towards FRBM (Fiscal Responsibility and Budget Management Act, 2003), the entire process of fiscal prudence and responsibility went out of the window. The latter half of the UPA rule was nothing short of destructive in this regard as money was poured into social welfare schemes where slippages, leakages and corruption were rampant. The populist farm loan waiver scheme of 2008 was a key vote-catcher, but equally a destabiliser in this regard. CAG had found in several cases where ineligible farmers were given benefits while the deserving were left out, pointing to large-scale possibility of fraud.The idea of creating the world's largest safety net was noble, but its execution was fraught with risk. At the very kernel of FRBM was the dire need to institutionalise financial discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.
As the spectre of a ratings downgrade grew, the UPA and finally the BJP decided to pony up. There was no alternative to fiscal discipline and more importantly a mechanism to reach subsidies to the last man standing in a more transparent manner. Targeted subsidies and control over spending became part of the new playbook. Of course, India's ever reducing oil import bill, courtesy the global oil glut, helped in this. Every one dollar move on crude helped India save as much as Rs 6500 crore on its oil pool deficit. From a high of $147, crude has been benign at an average of $35 per barrel lately. This has reined in the fiscal deficit to a great extent.
The NDA government had last year deviated from the fiscal consolidation path, postponing reduction in fiscal deficit target by a year. Now things have started stabilising. What is perhaps most heartening is that many of the states have also shown exemplary fiscal math to contain runaway deficits. It is often said that to build a better world, you have to tear down the old. While that may not be true about the BJP, given that it has taken a hard left turn and is now supporting welfare schemes in a big way, falling crude has given it and India a massive respite. Akin to the union budget, states have budgeted to contain the fiscal deficit to less than 3% by prudent spending. JM Financial analysing budgets of six states (Tamil Nadu, Karnataka, West Bengal, Gujarat, Rajasthan and Madhya Pradesh), the aggregate fiscal deficit drops down to 2.5% GSDP (vs 2.75%). States have also increased the capital expenditure spending by 23% YoY even as revenue expenditure remains lower at 10%.
a) Increased capital spending is focused on: Reducing stress in rural income by increasing outlay to rural orientated sectors (rural development, irrigation and agriculture),
b) Sharp increase in focus towards social sector across most states that have stepped up spending on urban development, water supply and primarily education and skill development, and
c) Transportation
Consequently, other economic sectors spending such as energy, industry, communication have witnessed a weak growth. Non-inclusion of 7th Pay Commission has also helped in easing fiscal deficit, but it transfers the deficit risk to next fiscal. Throw in OROP (One Rank One Pension) and this year becomes all the more crucial and there is every likelihood of finances once again going out of gear. Only a few states that signed up for project UDAY, the scheme to revive state power distribution companies, included the financial impact. In top three State Electricity Board debt ridden states, Rajasthan has budgeted an impact of ` 631bn over FY16 (` 430bn/625bps GSDP) and FY17 (` 201bn/ 262bps GSDP), UP has an impact of ` 133bn (107bps GSDP) in FY17 while Tamil Nadu is yet to sign the MoU.
The financial year 2016-2017 thus becomes vital in this journey to attain financial nirvana. What is perhaps even more worrisome is the precarious condition of India's banking system. A recent RTI revealed that 29 state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years. Only two banks, State Bank of Saurashtra and State Bank of Indore, have shown zero bad debts in the past five years.
Last word to Reserve Bank of India Governor Raghuram Rajan, the first Mint Street boss who has ensured that the stressed and bad asset problem is recognised and not brushed under the carpet. "Deep surgery is needed to clean up balance sheets; NPA recognition is anaesthetic to do surgery," Rajan had publicly said. Delivering a lecture earlier this year, he argued that the consolidated fiscal deficit of the centre and states together cannot deviate from its mandated path. "As Brazil's experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be very careful about jeopardising our single most important strength during this period of global turmoil -- macroeconomic stability", he said adding that consolidated fiscal deficit of the Centre and states rose to 7.2 per cent in 2015 from 7 per cent in the previous year. "So we actually expanded the aggregate deficit in the last calendar year. With UDAY coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the Centre to adjust more," Rajan had said.
The author is a senior journalist and commentator based in New Delhi.
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