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Friday, 16 March 2012 00:27
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Many parameters look ominously similar to what they were in that summer we shipped gold to the IMF


Given how the sharp fall in savings, and hence investments, are responsible for the slowing economy, it is obvious all eyes will be on the fiscal deficit later today. GDP growth has been the highest in 2007-08 when savings were the highest and has risen and fallen as savings rates have moved up and down. And as this column has pointed out before (‘Budgeting for clarity’, http://bit.ly/wcwvbl, February 27), savings cannot rise unless there is a reversal in the fall in savings of the public sector—from 5% of GDP in 2007-08, this fell to 1.7% in 2010-11. It is true corporate savings rates also fell during this period—household savings have remained relatively constant as a proportion of GDP—but the largest fall has been in public savings.

But there’s another reason why controlling the deficit is critical—and the deficit doesn’t include just the fiscal deficit that Pranab Mukherjee will report later today, but also the deficit of PSUs such as the oil sector ones that bear a R1.4 lakh crore under-recovery burden (that’s 1.2% of GDP!). Over the past few years, many parameters look ominously similar to what they were in that summer of 1991 when we shipped gold to IMF.

To be sure, there are many mitigating factors as well. We have an import cover today that’s more than three times as high as that in 1991 (8.5 months in 2011-12 versus 2.5 months in 1990-91). But a drawdown in reserves to protect the rupee ($19.8 billion between September 2011 and January 2012) suggests the protection can just as easily disappear if we’re not cautious. Exports in 2011-12 are three times as large, relative to GDP, but the year’s current account deficit is likely to be 3.6%, a figure that’s significantly higher than in 1991.

At 5.7% of GDP, the likely central fiscal deficit in 2011-12 is lower than the 7.84% in 1990-91 and the 7.5-8% levels for the five years prior to 1990-91. But add in the 1.2% oil under-recoveries of the PSUs, and you’re not far from that number even today. Bring in a Food Security Bill (it’s not clear if the Bill will figure in the Budget later today but most believe a beginning will be made) and you’re done for—Commission for Agriculture Costs and Prices’ chairman Ashok Gulati has estimated the Bill will cost R2 lakh crore per year for the first three years when it is being rolled out. The revenue deficit for 2011-12 is already higher than in 1990-91 and the ratio of the revenue deficit to the fiscal deficit shows the situation is more unstable today in some ways.

Add in the fiscal deficit of the states, and we’re pretty much near 1991 levels already, even without adding in the oil under-recoveries. Indeed, as Ficci’s Rajiv Kumar and Soumya Kanti Ghosh (‘Last straw on the fisc’s back’, http://bit.ly/wVNRN8, February 16) have pointed out, tax revenues are growing much slower today—they grew at 16% per annum in the 1980s, this fell to 15% per annum for the three years ended 2005-06 and to 13% per annum in the five years ending 2010-11. Market borrowings, meanwhile, are growing at 32% per annum today (in the last five years ending 2010-11) versus 12% per annum in the decade of the 1980s; at 30% per annum, the fiscal deficit is growing at 1.5 times the pace it was during the 1980s …

This is not the time to panic, but there is more than enough reason for the finance minister to be cautious as he presents his Budget today. And this means genuine caution, not the kind of feel-good that was induced last year with the finance minister making assumptions that looked unreasonable even then.



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