Back to 1991?

Many parameters look ominously similar to what they were in when we shipped gold to IMF

Written by Sunil Jain | Published:March 16, 2012 12:12 am

Many parameters look ominously similar to what they were in that summer when we shipped gold to 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 was the highest in 2007-08 when savings were the highest and has risen and fallen as savings rates have moved up and down. Savings cannot rise unless there is a reversal in the fall in savings of the public sector — from 5 per cent of GDP in 2007-08,this fell to 1.7 per cent in 2010-11. It is true corporate savings rates also fell during this period — household savings have reminaed 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 Rs 1.4 lakh crore under-recovery burden (that’s 1.2 per cent of GDP!). Over the past few years,many parameters look ominously similar to what they were in that summer when we shipped gold to IMF.

To be sure,there are many mitigating factors as well. We have an import cover today that’s four times as high as that in 1991. But a drawdown in reserves to protect the rupee ($19.8bn 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 per cent,a figure that’s significantly higher than in 1991.

At 5.7 per cent of GDP,the likely central fiscal deficit in 2011-12 is lower than the 7.84 per cent in 1990-91 and the 7.5-8 per cent levels for the five years prior to 1990-91. But add in the 1.2 per cent 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) and you’re done for — Commission for Agriculture Costs and Prices’ Chairman Ashok Gulati has estimated the bill will cost Rs 2 lakh crore per year for the first three years when it is being rolled out). The revenue deficit for 2011-12 is already higher 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 back’,IE,February 16) have pointed out,tax revenues are growing much slower today — they grew at 16 per cent per annum in the 1980s,this fell to 15 per cent for the three years ended 2005-06 and to 13 per cent in the five years ending 2010-11. Market borrowings,meanwhile,are growing at 32 per cent today (in the last five years ending 2010-11) versus 12 per cent in the decade of the 1980s; at 30 per cent,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.

The writer is opinion editor,‘The Financial Express’

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