Fiscal brinkmanship: Open-door policy to be blamed for rupee woes

At one go in Budget FY'13,plan expenditure was raised by a massive 26% in just one year.

Written by ENS Economic Bureau | New Delhi | Published: August 29, 2013 1:52 am

At one go in Budget FY’13,the plan expenditure was raised by a massive 26 per cent in just one year. This put paid to any idea of a fiscal consolidation even as the growth rate of the economy had started slipping badly.

The increase by former finance minister Pranab Mukherjee alarmed the Vijay Kelkar committee to advise the government on a fiscal consolidation road map. The committee,appointed in September of the same year,advised finance minister P Chidambaram to roll them back.

Related: Indian rupee sinks to new low of 68.85,logs biggest single-day loss

“To carry out fiscal consolidation,it is required to correct this (high) base in the Twelfth Plan… The fund requirement for most projects envisaged in the Twelfth Plan may be highest in the middle of the Plan period.”

As a result of the rise among others,the fiscal deficit was expected to shoot up to 6.1 per cent of the GDP after touching 5.8 per cent a year before. The finance ministry,after Chidambaram took over in August,had to drastically cut back all sorts of expenditure to end the year with a fiscal deficit of at 4.9 per cent.

The earlier brinkmanship was,however,in line with the fiscal open-door policy practiced in the post-election years of the UPA-II government from 2009 to 2012. It was the last and the most extravagant,but continued a trend begun with a fiscal stimulus of Rs 1,86,000 crore in FY’10.

There were three fiscal stimulus announced to spur growth in the economy in the course of a year and a half and the effects lingered.

For instance,in FY’11 the economy grew by 9.3 per cent but the next year,as the rupee slipped from 45,the finance ministry under Mukherjee asked the RBI to extravagantly draw down foreign exchange reserves by $12.8 billion to fight it.

The rupee stayed at 48 to a dollar. In the last fiscal,the government has added to the reserves by $3 billion despite the rupee depreciating to 54 and so far in this year too the forex reserves are holding up despite a 27 per cent dip in the value of the rupee.

The evidence of fiscal brinkmanship is evident in other numbers too. Budget documents show that fiscal deficit,after dipping for just one year to 4.8 per cent,again began to climb. It rose to 5.7 per cent and threatened to breach 6.1 per cent by FY’13.

The biggest element of this expenditure over run was subsidy. Aggregate subsidies rose from Rs 71,431 crore in FY’09 to Rs 1,11,276 crore the very next year. The trend persisted till FY’12 when subsidies rose to Rs 2,57,654 crore,a 131 per cent increase in three years.

The largesse,even on other heads were huge,like the time given to the farmers having more than two hectares of land to pay 75 per cent of their overdues under Debt Waiver and Debt Relief Scheme extended from June 30,2009,to December 31,2009. And raising of the allocation under MNREGA by 144 per cent in a year to Rs 39,100 crore again by FY’10. And incidentally,for three years,Mukherjee kept on promising a National Food Security Act.

In this time,he found time to write in a retrospective piece of legislation to bring the M&A deal of Vodafone with Hutch under the tax man’s lens. The measure

led to the first flight of investment out of Indian stock markets in FY’13.

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