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FISCAL EMERGENCY
- Some vital parameters of the economy are reaching dangerous levels

The author is an economist at the Indian Statistical Institute, New Delhi

The recent downgrading of rupee debts to junk status by the credit-rating agency, Standard & Poor’s, does not seem to have had much real impact. Quite predictably, government spokespersons condemned the decision. Somewhat more surprisingly, almost all economists have also questioned the wisdom of the downgrade decision. The stock markets have also virtually ignored the decision — I can’t recall even minor hiccups in the value of the Bombay sensex. And now that a few weeks have passed, there does not seem to be any mention at all of the downgrade decision in any newspaper. The real issue is not whether there will be any default in payment of these rupee debts — there certainly won’t be.

Local debts incurred by the Central government are denominated in rupees. Since the government has a monopoly on the quantity of money it prints, it can always pay off any level of debt by simply printing more money. Lenders to the government cannot protest if the government adopts this strategy because the rupee is legal tender in India. Of course, excessive recourse to the printing press would have disastrous consequences for the economy. And this is precisely why the Standard & Poor’s downgrade decision has to be taken more seriously. The decision reflects a concern that some vital parameters of the economy are approaching dangerous levels. In particular, there are signs that the fiscal health of both Central and state governments needs immediate treatment.

Consider, for instance, some of the following facts. For several years running, the Central government has been unable to contain the fiscal deficit to reasonable levels — it has been hovering around 6 per cent of gross domestic product. Many state governments (including West Bengal) are almost bankrupt. The Central government continues to indulge in expensive bailouts. Following the Unit Trust of India bailout, the government is in the process of offering support to the Industrial Development Bank of India and the Industrial Finance Corporation of India. In addition, state governments have been allowed huge debt-swaps every year for the next five years.

A few state governments (again including West Bengal) have been extended additional financial support. Not surprisingly, the consolidated debt of the Central and state governments is estimated to be roughly 80 per cent of GDP this year. Assume that the Central government does not adopt the simplistic solution of simply printing additional money. A couple of obvious questions emerge. How will the Central government finance these expensive bailouts in the short run' And what can be done in the long run to prevent these periodic financial crises'

Of course, the immediate problem of the Central government has been made more acute by the decision to postpone the sell-off of the oil giants, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited. This decision has ensured that the government will not achieve the targeted revenue from disinvestment during this fiscal year. It is likely that the government will cut back on development expen- diture since that is the politically expedient move. After all, the adverse effects of such a move are not felt immediately.

But, this strategy of cutting back development expenditure cannot be sustained over the long run. So, it is important to step back and analyse why the fiscal crisis has assumed such alarming proportions. At this point of time, it seems difficult to believe that there was actually a time when several governments, both at the Centre as well as in the states, actually had surpluses in their revenue budgets. But this was not uncommon in the Seventies and earlier. The revenue surpluses enabled governments to finance at least modest levels of development expenditure without running unduly large overall deficits.

The watershed came in the Eighties when governments started running deficits even in their revenue budgets. In the early Eighties, the revenue deficit of the Central government was still modest, being slightly over 1 per cent of GDP. This figure has climbed steadily and has now crossed 4 per cent of GDP. The combined revenue and expenditure of the states actually reveals a revenue surplus for the period, 1980-81 to 1984-85. Unfortunately, the states soon followed the example set by the Centre — expenditures rose steeply while receipts stagnated. The net effect has been a current revenue deficit of over 3 per cent.

The roots of the fiscal crisis can be traced to adverse developments in both the revenue and expenditure sides. Government revenues have not been increasing at anything like the required rate. The “culprits” are a falling ratio of taxes to GDP as well as stagnant non-tax revenues. The buoyancy of Central gross tax revenues during the Nineties has been only 0.91 whereas it was 1.15 in the Eighties. State tax revenues show a remarkably similar pattern. A major reason for the lower buoyancy of Central tax revenues has been the sharp deceleration in revenues from excise taxes and customs duties. Perhaps, one reason for the failure of excise taxes to generate sufficient tax revenues may be the growing importance of the services sector in the overall economy combined with the lower rate of taxation of this sector. There have been some efforts to increase taxation of the service sector, but these are yet to bear fruit.

Much has been written about the need to supplement tax revenues by generating adequate non-tax revenues from public sector enterprises. Unfortunately, there has been very little effort to improve the efficiency of public sector enterprises. Here, the record of state governments is even worse than that of the different Central governments. State governments are also particularly averse to raising user charges so as to make departmental undertakings economically viable.

Governments must also curb all non-developmental expenditures. Government expenditures have shot up after the last pay commission awards. The blame lies entirely with the governments for implementing only a part of the pay commission recommendations because the commission had also pointed out the need to downsize governments. This need not have been done by actually terminating anyone’s service. Governments could simply have taken advantage of the regular attrition due to retirements. Unfortunately, vested interests have ruled the roost and governments remain as bloated as ever.

Another area crying out for attention is the number of subsidies doled out to various interest groups. Perhaps, the only uniform underlying pattern of these subsidies is that they tend to accentuate inequalities. For instance, rich farmers benefit more than small farmers from the fertilizer subsidy if only because they buy more fertilizer. Similarly, the urban middle class are the biggest beneficiaries of the public distribution system — many of the really poor do not even have ration cards. Despite some increase in fees, students continue to pay only a fraction of the cost of college and university education. Since the majority of graduates come from relatively affluent families, this is another instance of taxpayers’ money being “captured” by the relatively rich.

Unfortunately, all political parties indulge in “competitive populism”. Every party opposes any attempt to reduce subsidies. The only way of rationalizing this behaviour is in terms of their political compulsions. The beneficiaries of subsidies are the vocal middle class, and all parties feel that they have to cater to the interests of this large vote-bank.

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