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We're in a mess

Feb 9, 2009

Almost 90% in debt, with little to spare and a wide scale pre-election spending to see, India's balance sheet is in a real mess. And the most horrifying part of this is that the perpetrator, the government, is not recognising it at all! Apart from the official mention that the deficit (excess of expenditure over income, funded by borrowings) is on a rise, we are yet to hear any meaningful caution from the government of the mess that it has brought us into. Rising fiscal deficit is a silent killer, and has already been eating away into India's economic growth for the last several decades.

Apart from the usual suspects like higher expenditure on salaries to government employees, mounting interest payments, improperly targeted subsidies and lower tax to GDP ratio, this time the economic stimulus is also playing its part in worsening the misery.

We remember a statement from the current finance minister a few years back. "The deterioration in the fiscal situation has not shown up in a crisis, so far, because of the strong fundamentals of the economy," he said. This is because inflation remained low all this while and interest rates were generally at historically low levels. A huge build-up in foreign exchange reserves also supported the government's case.

Times have changed now. The global economy induced slowdown has already cast its wings on India. Corporate profitability has slowed down considerably and companies are scampering for funds for meeting their day-to-day needs, forget the huge capital expenditure plans that over which dust has settled.

And while the government, through the Reserve Bank of India, has tried to soothe nerves by lowering the cost of money, people (investors and consumers alike) are scared enough to bite the bullet. We also haven't heard any take-off of the fiscal stimulus plans, apart from the fact that so much funds have been allocated to the same.

What we are rather hearing from representatives in the planning and finance divisions of the government is that the situation is not really worrying. The Deputy Chairman of the Planning Commission has maintained that "high fiscal deficit will not in any way hamper the flow of foreign investments." The gentleman is still worried about what foreigners will do when one is not clear what the insiders (Indian investors and consumers) are thinking and doing?

He has also said that "high fiscal deficit due to economic down turn is a global phenomenon and India is no exception." We fully agree to this last statement. Our only question is - why has the government not been able to clear the mess in the heydays of 2003 to 2007, when the economy was booming and government coffers were loaded?

Indian Express reports, "The budget estimates for 2008-09 promised a revenue deficit of 0.5% and a fiscal deficit of 2.5%. But this was without providing for items like farmers' debt relief, Sixth Pay Commission and National Rural Employment Guarantee Act (NREGA). So the budget estimates were fudged and on February 16 we will know the Centre's fiscal deficit is 6.5% of GDP. That's without including Oil and fertilizer bonds, which have adverse effects similar to those of the fiscal deficit. With those off-budget items thrown in, the Centre's deficit will be 9% of GDP."

These are horrible figures! We shall soon see the country's sovereign credit rating downgraded, and that is a lesser issue. The big issue is that while all the governments all these years recognised the demon of excess spending, the responsibility to tame it disappeared completely under the current government.

The politicians have already found scapegoat in the external slowdown for the mess they themselves have created. But the fact remains that wherever we are today is all thanks to populist expenditure and flagship programmes that, while benefiting the politicians, are yet to benefit the lives of those governed - we the people!

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