IMPLICATIONS OF A GROWING FISCAL DEFICIT
by T. G. Jacob
The annual budget and the Economic Survey preceding it are no doubt important pointers at the macro economic policies that are set to guide the economic welfare of the people at large and the general health of the economy. These are times of global recession with its attendant crisis of capitalist/imperialist accumulation and the Indian economy is by no means immune to its claws. This is being repeatedly emphasized by the basic indicators of the economy like growth rate, capital inflows and outflows, and price levels that are going contradictory. The consumer prices of essential goods are getting totally out of control while the official inflation rate is showing negative ever since the recession started showing its fangs! There are no control mechanisms in place and the prices of essential commodities are solely subject to speculative trading. What it means in very simple terms is that the corporate sector is having a bad time in terms of profitability and shrinkage, while the common man is made to pay exorbitant prices for articles of daily consumption which he has to get from the market. The stock market which has actually nothing to do with the vast majority of people is being projected as the end all and be all of the whole economy, which shows that the day-to-day lives of the people are being considered only as a side-effect of the corporate exigencies. Mainstream media, which is only a corporate side kick, because it is owned by them and created to serve their purposes, is doing its faithful job as a congenitally blind man identifying an elephant.
The annual budgets, both at the State and central levels, are basically economic exercises projecting the annual income and expenditure and charting the means of hiking both. Surplus budgets became a thing of the past long back. Budgets are invariably deficit ones and it is only a question of how much the deficit is and its rate of increase over the previous years. On that count the present central budget has crossed all the previous limits and the deficit as percentage of the gross domestic product has reached a whooping 6.8. In the course of the financial year this is expected to rise by another 2%. The budget being a general document does not go into the details of how the government plans to raise this huge amount of money. But the options are limited. It can only be raised through borrowings and by selling off publicly owned assets. Both these avenues of raising liquid resources are being actively pursued by the government. In fact, the current task of every central ministry is concentrated on what and how much of the profit making public enterprises can be sold to national and international private capital. Huge public borrowing, of course, means huge interest payments, which by themselves will become a significant part of the total expenditure.
The last budget is exactly on the lines of the budgets presented by the advanced capitalist countries currently reeling under conditions of recession and which also happen to be the epicenters of recession. The US budget projected a deficit of nothing less than a trillion dollars and the UK one fared no better. In both these cases the emphasis is on the mobilization of publicly available resources so that buoyancy can be injected into the economy to lessen the cascading impact of the recessionary process. What China is doing is even more interesting. The Chinese government is directly intervening in the market by liberally doling out subsidies to the vast middle class segments coupled with aggressive bank lending so that more and more demand can be created for consumer durables. But with more than 20 million unemployed created within a period of one year it is doubtful how the downswing can be blocked, however massive the state intervention is. At the same time we have to keep in mind that economic experts are not at all sure that all these huge exercises are going to result in blunting the recessionary trend which is actually hitting more and more segments of the global economy.
The current recession has clearly resulted in a paradigm shift from so-called free enterprise and free trade to exercising controls and manipulations of the market from above with the aim of creating effective demand that is expected to prevent the slide in employment and income. In other words, the crisis has brought back Keynesian economics, which had been ousted from the policy-making levels by monetarists like Milton Freedman and his free enterprise, free trade followers during the previous boom time. Another interesting thing to note is that it was the boom itself that has created the recession, and hence Karl Marx’s analysis of the capitalist system as one with a built-in tendency to generate crisis once again comes to the forefront. It was the Great Depression of the 1930s that produced Keynesian economics of macro economic dynamics. It also produced the Second World War. These historical lessons are not entirely lost on the world. The shift in macro economic policy that is seen now is indicative of that.
The Indian Finance Minister characterized the unprecedented level of deficit financing as a “calculated risk”, which by direct implication means that it was unavoidable. It was unavoidable because the economy has already been integrated into the global neo-liberal economic regime, which has produced highly unsavory results in the wake of the setting in of global recession. Going back on globalization is ruled out because there is no other basic economic programme that is visualized. On the other hand, the crisis itself is producing more privatization and more and more incentives to global capital in the form of Special Economic Zones. It is being hoped that the disease that is now plaguing the economy can be alleviated by injecting more doses of the causative factors. The budget is not really a long term exercise, but a short term one. And as such deficit financing by itself need not be a bad thing. It depends of how far and how much dynamism can be injected into the economy through heavy borrowing. Heavy interest payments will certainly be a drag on this hoped for dynamism. Also, the significant hike in defense expenditure is not going to contribute anything to boost basic economic morale. Increase in defense expenditure directly results in outflow of hard cash because most of the advanced defense equipments are imported. Highly populist programmes like NREGA and Bharat Nirman have proved politically advantageous, but how far such huge outlays will inject dynamism into the entire economy remains to be seen. Of course, more liquidity in the agricultural sector and among the underprivileged will certainly lead to more demand, but the sufficiency of this newly created demand to overcome recessionary trend is subject to serious doubts. All these uncertainties cast a dark shadow over the calculated optimism.
Yet another factor that made the present massive deficit financing is the increasing gap between revenue income and revenue expenditure since the last few years. Within the last three years revenue deficit increased by more than four times. During this period revenue expenditure increased by more than Rs 300,000 crores, while revenue income increased by a paltry Rs 35,000 crore. The gap is colossal and this is a situation that makes massive deficit financing of expenditures an inevitability. All the above-mentioned factors like populist programmes, steep rise in defense expenditure and heavy interest payments led to this gap between income and expenditure. The share of non-productive expenditure in total expenditure is further going up as is shown by the present budget proposals. The government is bravely saying that it is confident of bringing down the deficit progressively on a year to year basis but economists do not give much credibility to such unreal claims.
If the huge deficit amount garnered mainly through borrowings can be effectively put to use in augmenting the basics of the economy in a substantial manner such financing can create a serious momentum by creating more employment, income and effective demand. If not, the problem will only get more vicious and hopeless. And such an eventuality can easily lead to the begging bowl syndrome of taking loans from international banks and super bankers like IMF and World Bank at usurious interest rates and strangling conditions, which will make the economy even more dependent on the uncertainties of and pillaging by global capital.
When greater reliance is put on non tax revenues like borrowings and receipts from selling shares of public sector assets by the centre, it is bound to affect the finances of States in an adverse manner. This is because there will be no sharing of non tax revenues with the States unlike in the case of tax revenues. This has serious implications for centre-State financial relations and the federal structure itself. Centralization of financial resources will get a further boost when non tax revenues becomes more and more dominant as it is happening now, and this is something that has potent political implications too. This is happening in the background of several States like Kerala already wallowing in financial bankruptcy with only share of central tax income to look forward to. The only alternative for such States will be to cut back on welfare schemes and resort to greater borrowings and interest payments. State governments as such have limited resources to finance developmental projects, and this resource base will shrink further when non tax sources become the main means of raising resources.
The corporate sector is not very happy with the outlays for populist schemes, but at the same time is sensible enough to see that such schemes are necessary to maintain political stability and vote banks for a government that is very much their own government. Selling off of profit making public enterprises is certainly to their benefit. The government says that by retaining nominal share capital majority the ownership and control of these enterprises with vast infrastructural facilities will remain in the public domain does not really carry much weight because the corporate policies of these enterprises are really not different from the private sector corporate enterprises and the selling can only be in a phased manner. Any argument that public sector enterprises that are working well in terms of profits should not be sold off does not make any sense because there will simply be no one to buy the shares of loss making or sick enterprises and loss making enterprises will only have scrap and land value in the market and will not serve the purpose of the government which is one of raising enormous non tax revenue.