Budget deficit as a ratio to GDP
IT HAS become an accepted practice with the Finance Ministers to present deficit budgets and to relate the same as a ratio to the GDP, since a mild dose of deficit finance can be a stimulant to the growth of the economy. The Union Finance Minister presented the budget proposals for 2005-06 with a revenue deficit of Rs.95,312 crores and a fiscal deficit of Rs.1,51,144 crores. As a ratio to the GDP the revenue deficit would be 2.7 per cent and fiscal deficit 4.3 per cent.
He claims that the GDP-GFD ratio was brought down by 0.5 per cent in 2004-05 and that the deficit would be brought down further to the level fixed by the Fiscal Responsibility and Budget Management Act by 2008-09. However, the burden of deficits has been rising year by year. In 1970-71, the fiscal deficit accounted for only Rs.1,408 crores. It increased to Rs.8,299 crores by 1980-81, to Rs.44,632 crores by 1990-91 and to Rs.1,18,816 crores by 2000-01. There is thus a steep rise in the absolute size of the fiscal deficits over the years without any sign of a fall.
Unreliable indicator
Admittedly, there is a consensus among the scholars that growth of deficit finance beyond a limit can undermine the economy. However, nobody is sure as to the precise limit up to which deficit can be resorted. Instead of prescribing such a safety limit, their approach seems to be to look at the GDP-GFD ratio as an indicator for evaluating the seriousness of the deficits in the economy and thereby to apply corrective measures. At the same time, the governmental approach seems to be to raise the GDP by applying further dose of deficits instead of reducing the expenditure or tax rates for populist reasons. Even the Fiscal Responsibility and Budget Management Act seems to rely on a reduction of GDP-GFD ratio as a sound measure for correcting the danger from deficit financing. The question is how far can GDP-GFD ratio be regarded as an authentic indicator for evaluating the seriousness of budget deficits in the Indian economy.
An evaluation based on GDP-GFD ratio by itself seems somewhat meaningless in a country like India for a variety of reasons. First, much of the statistical data needed for compiling the national product are inadequate and even unreliable. Secondly, the periodical revision of the GDP, undertaken apparently for the purpose of accommodating structural changes in the economy, very often results in an abnormal spurt in the very size of the GDP. The revision with 1993-94 as the base resulted in inflating the figure by 9 per cent in 1993-94, the base year itself, in comparison with the estimates based on 1980-81 series. In the case of Kerala, the revision resulted in a spurt of 18 per cent in the volume of SDP compared with the volume based on the previous base.
Such abnormal increase in the size of GDP can certainly reduce the GDP-GFD ratio. Changes in the data base as well as the methodology are stated to be the reasons for the increase in the value added by certain activities/services. In the case of ownership of dwelling houses for example, "the estimate of GDP in 1993-94 went up to Rs. 44,140 crores in the new series as against Rs.21,981 crores in 1980-81 series, showing an increase of Rs. 22,159 crores," apparently on account of the change in the methodology.
Who knows whether such an increase in the magnitude of GDP will not take place with the revision due before 2008-09, the date fixed by the FRBM Act for bringing down the GDP-GFD ratio? It may adopt new norms in the valuation of activities/services in the estimates of GDP in the context of what some state accountants speak of as underestimation in areas like that of the organised and unorganised service sector. In such an eventuality, budget deficits can be brought down to the level stipulated by the FRBM Act, without actually curtailing the deficits at all.
If the GDP-GFD ratio remains an unreliable indicator for assessing the seriousness of deficit financing, what alternative can be adopted for evaluating the seriousness of the issue, and thereby to assess the debt bearing capacity of the economy? Why not think of adopting the cumulative volume of debt or the volume of debt charges as a ratio to the revenue receipts of the government to be an alternative?
There is something definite about the volume of debt or the debt charges unlike the ambiguity regarding the real size of the domestic product. In 1970-71, the revenue receipts totalled Rs.3,293 crores. The interest charges on the other hand amounted to Rs.606 crores accounting for18 per cent of the revenue receipts. By 1990-91 the revenue receipts totalled Rs. 54,954 crores with the interest payments amounting to Rs.21,498 crores. The interest payments accounted for 39 per cent of the revenue receipts. The interest payments would be Rs 1,33,945 crores in 2005-06 against the anticipated revenue receipts of Rs.3,51,200 crores. As a percentage, it accounts for 38.13. Apparently, very little correction has been effected in the deficits so far. In addition to the interest payments of the Central government, the interest payments of the State governments are also increasing at an alarming rate which is sure to add new dimensions to the burden of the economy.
Accumulated debt
The conditions of buoyancy which the country now experiences may not remain for ever. There are indications of the country falling into a debt trap. The accumulated debt of the Central and State governments put together adds up to Rs. 30,00,000 crores. Some of the State governments like that of Bihar have not been able to pay the salary of its employees for months on account of non-availability of funds. All such indicators point to the heavy burden on the economy brought about mainly by the growing volume of deficit financing. The positive factors like the accumulated foreign exchange reserves and the inflow of private transfer payments, which prop up the economy from crumbling under the heavy weight of the mounting deficit finance, may not be able to hold for long. Drastic reduction of the deficit financing and not adjustment of the GDP-GFD ratio is the only way out for salvaging the economy and keeping it intact.
K.V. JOSEPH
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