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  • : Government finances: Check...check...!!!

    Government finances: Check...check...!!!

    India has been on a growth path since the opening of the economy in the early 1990’s. And it continues to grow impressively. A GDP growth rate of about 6% is good enough a reason to look at the Indian markets as an investment destination vis-a-vis some of the other developing countries. Just to put things in perspective, in the decade to FY00, India has grown at an average GDP rate of 6% compared to Thailand, Korea or Indonesia, which have had a relatively lower average growth rate. The leader, undoubtedly, has been China, with average GDP growth rate of over 10% in the period from 1990-2000.

    Note: Centre and States combined
    Source: RBI Annual Report 2002-03

    However, one big concern for India continues to remain…that is its huge fiscal deficit. The above chart indicates the combined Gross Fiscal Deficit (GFD) of the Centre and the State governments, which in FY03 was at a staggering 10.1%! According the Reserve Bank Of India (RBI) Annual Report 2002-03, this was a full percentage point higher than what was targeted owing to a shortfall in tax revenues and divestment receipts (budgeted).

    On the total expenditure front, the scenario improved marginally, as the government was able to control it around the budgeted levels. However, the quality of expenditure raises some concerns. As can be seen in the chart above, the developmental expenditure has come down from over 17% of GDP in early 1990’s to the current levels of below 15% of GDP. In the same period, the non-developmental expenditure has risen from around 11% in 1990-01 to 15% of GDP (budget estimates for 2003-04). This is not a good indication as it indicates that the finances that should be used for improving the productive capacity of the economy are rather being spent on managing the administrative expenses of the government.

    Note: Centre and States combined
    Source: RBI Annual Report 2002-03

    Also, it seems that the government has not been able to effectively utilize the benefits of the soft interest regime prevailing in the economy. As can be seen in the above chart, the total interest payments of the Central and State governments combined constitute over 6% of the GDP and this has steadily increased from about 4% levels in 1990-01. The interest payment is directly related to the total debt of the government, which it needs to service. The total debt has increased from 62% of GDP in 1990-91 to 77% of GDP as in 2003-04 (budget estimates). Moreover, out of the total revenue receipts in 1990-91, 24% of it went towards servicing of debt. The figure currently stands at 34%!

    So, are things going to improve from hereon for the Indian government? If we look at certain indications, it seems so that things should improve going forward. To begin with, on the revenues front, as the divestment process gathers pace and the government is able to realise its budgeted divestment receipts, it will help to keep itself in line with its targets. Moreover, on the debt front, the government has started taking initiatives to pare and restructure the same at lower interest rates. It must be noted that last fiscal, government prepaid high-cost loans slightly less than $3 billion taken from World Bank and Asian Development Bank. Now, backed by the cushion of huge forex reserves to the tune of US$ 86 bn, there are reports that the government is planning to pre-pay more foreign loans, which will help it to keep a check on its interest outgo (nearly Rs 1.2 trillion) and the country’s fiscal deficit. Moreover, the benefits of swapping of high-cost debts with state governments and buy-back of high interest bearing securities will further help the government to control its interest expenses. So, all in all, as of now, the government seems to be moving in the right direction!

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