Sunday, Dec 04, 2022

Bubble,bubble,toil and trouble

With irresponsible spending and fantastical accounting,the government’s word now means nothing

Several points about this government’s deficit figures are to be borne in mind.

First,notice how far the government has departed from the limits that had been prescribed in the FRBM act,limits that were acknowledged all round to be necessary both as prudence and to maintain our credibility for investors and creditors abroad. That the gross fiscal deficit had climbed to an average of 7.7 per cent of the GDP in the late 1980s had raised alarm all round. Accordingly,under the FRBM legislation it was decided that this ratio must be brought down from 6.2 per cent in 2001-02 to 3 per cent in 2007-08; and that the revenue deficit must be eliminated by March 2008 and a healthy surplus must be built up in the following years. The GDF/GDP ratio will be more than double the target; the revenue account,instead of being a surplus will be in deficit — a deficit close to 5 per cent of GDP. Economists apart,the CAG has been compelled to make severe strictures on the gross irresponsibility that has resulted in these deficits,and charge the government with heaping burdens on future generations. Do you think that will make any difference to these know-it-alls? 

Second,the government certainly cannot claim any surprise at deficits having climbed so high. Several commentators outside Parliament; persons like Jaswant Singh,Yashwant Sinha and me,inside Parliament repeatedly showed how the Budgets — in particular the last Budget — were grossly underfunded,and that the country would be saddled with the costs of such subterfuge. To no avail.

Third,the deficits have absolutely nothing to do with any planned Keynesian stimulus to the economy. They have arisen wholly from the profligate mismanagement of the preceding three years — in particular,of the last year,2008-09. In turn,there were two aspects to this dereliction. To begin with,the items on which governmental funds were expended have left next to no capital assets in their wake — they were just populist heads. Furthermore,the resources that were needed to fulfill these populist commitments were grossly understated. They were understated deliberately and for a purpose: so that the government could claim that it was adhering to its obligations under the FRBM Act. The subsidies on fertilisers and petroleum,the amounts that would be required for the debt waiver,the incidence of the pay commission — items that figured in the Budget itself,items that were well known — were just left out of account. It is on the basis of such concealments that the government claimed,as Chidambaram did in his Budget speech of February 2008,“Honourable members will note that not only will I achieve the target for fiscal deficit under the FRBM Act,I have also left for myself some headroom. In the case of revenue deficit,I will meet the target of annual reduction of 0.5 per cent.”

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Far indeed from being a stimulus,the deficits have by now foreclosed options: they have left little room for the stimuli that are needed. The prime minister’s own economic advisory council says as much. “The pre-existing high levels of debt and fiscal stress also limit the available headroom for a counter-cyclical thrust of fiscal policy,” it states in its Review of the Economy,2008-09. “In the prevailing situation re-prioritisation of government expenditure and speedy implementation of already funded projects at the Central and state levels are critical for the fast revival of the economy.” Any evidence of “re-prioritisation of government expenditure”? Any evidence of steps to ensure “speedy implementation of already funded projects”? In fact,the enormous quantum of borrowing that the fiscal profligacy of the last three years has made unavoidable for the coming year — estimated to be well over Rs. 3,60,000 crore — squeeze the options further. Not only will the government have little money to fund ambitious infrastructure projects,this level of borrowing will leave little for borrowing by the private sector on whom the government is depending more and more for financing as well as executing these projects. With overseas sources having dried up,large corporates are turning to our banks. And so the only consequence will not just be that there will be less for infrastructure projects,the small and medium enterprises will find it that much more difficult to finance their operations. They would have been pre-empted at the banks by the large corporates.

Indeed,precious time was wasted all along: recall the endless discussions on whether some part of mounting foreign exchange reserves should be used for leveraging an infrastructure fund; recall the tardy,not to say stately pace at which schemes such as that to fund “viability gaps” of projects were handled; recall how nothing but nothing was done either to build up the much-talked about shelf of projects,nor to institute incentives for rapid execution of projects that had been approved.

Fourth,alarming as these deficit figures are,they are almost certainly underestimates even now,and doubly so. As has been pointed out,on the one hand the growth of nominal GDP is liable to be less than the Budget assumes,and,on the other,so are the revenue proceeds. Even that is not the end of the story. The deliberate understatement for 2008-09 and the deliberate underestimation for the coming year continue. To cite just one instance,the Business Standard ( February 20,2009) has nailed how the fertiliser subsidy has been understated. The subsidy payable for 2008-09 is Rs. 102,000 crore. It has been shown to be Rs. 75,847crore. Wonder of wonders,for the coming year,it has been shown to fall to Rs. 50,000 crore! As the paper has pointed out,not only is some of the subsidy due this year liable to spill over into next year,even if prices of fertilisers fall,the fall is liable to be offset by the depreciation of the rupee.


Fifth,such gross departures from what Parliament has mandated raise the question,“What exactly is Parliament approving when it approves the Budget?” For 2008/09,the revised estimate for the gross fiscal deficit is two and a half times the Budget estimate; that for the revenue deficit is nearly four and a half times the Budget estimate. Net borrowing by the government is liable to be two and a half times the budgeted figure. Indeed,as has been pointed out by observers,it is Rs. 40,000 crore more than the borrowing figure that was announced just a week before the Budget. At 182 per cent,132 per cent,125 per cent,85 per cent,the figures for subsidies,pensions,total revenue non-plan expenditure,defence expenditure respectively — to take just a few examples from among the bulkier heads — bear no relation to what the Parliament approved.

TRANSPARENCY: The CAG’s report which was tabled in Parliament on February 20 2009 documents at length what it calls “opaqueness in government accounts.” There are “significant deficiencies” in the accuracy,completeness and transparency of the accounts,it states. Eight “important statements” which four years ago the twelfth finance commission had said must be included in the Union finance accounts,are still not included. The inclusion has been “accepted in principle,” the government tells the CAG. “The process of consultation is on,” it tells him. The actual inclusion “would be a time consuming exercise.”

We get a glimpse of what is happening in the meanwhile. In 2007-08,the Centre transferred Rs. 51,260 crore directly to “autonomous bodies,societies and non-governmental organisations” ostensibly for implementing centrally sponsored schemes. What happened to these fifty one thousand two hundred and sixty crore rupees? “The aggregate amount of the unspent balances in the accounts of the implementing agencies kept outside government accounts is not readily ascertainable,” the CAG records.


Furthermore,CAG finds that fifty per cent of the total expenditure listed under 28 major heads of the government accounts,an amount of Rs. 20,273 crore has been lumped under a minor head,“other expenditure”. “This indicates a high degree of opaqueness in the accounts,” the CAG observes in characteristic understatement. Giving further examples,the CAG concludes,“This shows that the existing structure of the government accounts does not truly reflect the current activities of the government in these ministries/departments.”

The CAG contrasts the original provisions that were approved by Parliament when Chidambaram presented the Budget for 2007-08 with the supplementary provisions that government had to present within a few months. The supplementary provisions were 143 per cent of the original provisions in the case of the civil aviation Ministry; 1378 per cent (yes,1378) in the case of the department of economic affairs; 10,761 per cent (yes,10,761) for the ministry of labour and employment; 718 per cent for the ministry of petroleum and natural gas. Such large discrepancies are due to “unrealistic Budget assumptions,” the CAG points out.

Is this accountability? Is it responsible budgeting? Look at the myth we live by: on the one hand,we follow the obsolete British convention that a cut of just a rupee in any item in the Budget must cause the government to resign,and,on the other,governments so casually disregard what Parliament bound them to do. And yet,the budget is but a symptom of the way economic policies have been managed in the last five years. Reforms were left to rot. The “dream team” insinuated that the Communists were not letting them do anything. The responsibility actually rests with that team itself. The “team” exemplifies a type: persons who believe in nothing. For commitment to a cause — say,reforms — does not mean that one makes the occasional speech on it. Commitment is measured by what you are prepared to stake for that objective.

The stoppage of reforms prepared the ground for the slowdown. And the exact repetition of what had been done in the mid-1980s sealed it. Prices started rising,in part because of shortages of specific commodities,in part because of erratic announcements and policies — recall how food stocks were allowed to run down to dangerous levels; recall the announcements and reversals of announcements on imports of wheat and other commodities. Prices rose. Instead of attending to the specific problems and shortages that were triggering the rise,the government,exactly as had been done in the mid-1980s,wielded the axe of monetary policy: interest rates were raised,CRR was raised. These measures choked growth without reining prices in swiftly enough.

By early 2008,anyone who traveled to factories and industrial estates could see that the momentum was petering out. By March,a minister of the government itself had acknowledged in answer to a question in Parliament that 25 lakh jobs had been lost in three sectors alone. As the tsunami of the financial crisis rose,Chidambaram and Manmohan Singh,and sundry chota-motas of the government stood firm — on denial. “Our fundamentals are strong,” they declared. Had the fundamentals of the Southeast Asian economies collapsed? Had the fundamentals of Argentina,Brazil,Mexico collapsed when their economies went into a tailspin? Indeed,has anything happened to the fundamentals of the US,Japan,European countries today? But “our fundamentals are strong” it was.


Next,the country was fed — and,I am so sorry to say,leading economic papers broadcast this nonsense — “We are effectively decoupled.” Decoupled? Twenty per cent of the GDP,which is what our exports are by now,is no inconsiderable figure. Remittances are over $ 45 billion. Even a fool could see that the slowdown in the Middle East,in the West would lower this figure. Similarly,IT earnings are close to $ 50 billion: how could they remain unaffected when some of the largest clients of our companies were literally collapsing? Even more than these interconnections,we are intertwined with developments elsewhere because of the overriding determinant: confidence. That knows no boundaries. The way our markets would every day mimic what had begun to happen to Nikkei in the morning,and what had happened to the Dow overnight was a daily reminder of this. But so were eruptions in the “real” economy: the fact that importers abroad were not honouring their letters of credit; the fact that they were not lifting goods that had reached their ports; the cancellation of orders… But “decoupled” it was. And then,superciliousness,not to say piety,was made policy. “Just casino capitalism,” Manmohan Singh said as he returned from Japan. Vital months were lost. 

PUFFING UP THE BUBBLE: Such dereliction is in itself a crime against the country. But there has been more than dereliction: the government actively fed the bubble as it swelled,and then decreed measures that accelerated the downswing. To take just one instance,in Parliament and outside,my good friend Bimal Jalan warned more than once that the soaring ascent for which the government was taking credit was a bubble,that it just could not,and would not be sustained. With dividends having been exempted from taxes; with interest rate differentials having become what they had; with higher and higher institutional inflows chasing a small range of equities and the resulting sharp increases in stock values; with the appreciation of the rupee,a person abroad could shift money to India,earn a 100 per cent return,and take his money out. It doesn’t take rocket science to see that this just cannot be sustained,Bimal warned repeatedly.


Others gave similar warnings. Chetan Ahya and Ridham Desai wrote a series of analytical reports in which they pointed out how the entire bubble had come to swell merely because of foreign inflows,and,in these,on inflows from the most fickle segment among foreign investors,the institutional investors. In emerging economies other than India,foreign direct investment is around 75 to 85 per cent of foreign inflows,they pointed out,and institutional portfolio inflows are around 25 to 15 per cent. In India’s case though,the proportions were running at just the opposite levels. These inflows reached unprecedented levels: whereas in 2001-03,India received around $ 10 billion a year as foreign inflows; in 2007-08 it received $ 107 billion. Sarkari propagandists claimed this testified to the excellence of the government’s policies. In fact,as Bimal and others were pointing out,it was just arbitrage money. These inflows were what fueled the easy credit cycle: in the last five years,credit creation grew at a rate double that of nominal GDP. The swing was bound to reverse.

But who would listen? Certainly not “internationally famous economists”,certainly not “dream teamers”.


By October 2008 it seemed that those in authority were active participants in the market: it really will be instructive to juxtapose their announcements with the gyrations of the market in the latter half of 2008. Absolutely inexplicable steps were decreed. As everyone was pulling his money out,as there wasn’t even a remote chance that amounts would be brought into India,P-notes were suddenly sanctioned again: this in the wake of the national security advisor having warned that terrorist money was coming into the stock market,that the strictest inquiries must be made about who is bringing in money lest our financial system is destabilised,lest funds brought in anonymously are utilised for financing anti-India operations. Not just that,even as other countries moved to stop short-selling,the government allowed it to continue. Indeed,it went one better: even “naked short-selling” — a nefarious practice which cannot but sharply amplify the amplitude of market swings — was allowed to continue.

I remember our meetings with leading figures from the market as well as leading industrialists. We studied first-hand reports of what was happening all round the country,and tabulated a set of recommendations. The government had no time for any dialogue. We released them in public. During one discussion in the Rajya Sabha,Yashwant Sinha drew attention to these recommendations. Chidambaram’s response was typical: FICCI has given its 10 points,he said; CII has given its 8 points; BJP has its 12-point recommendations. All of them will be examined by government as and when necessary. What loftiness!

That is the attitude that has brought us here. Growth slowed down. Reforms that would ensure future growth,arrested. Infrastructure that future growth requires,at a crawl. Government finances out of synch. Too little being done,too late,to stimulate the economy. The worst of it: the word of India’s government devalued. Not an Interim Budget. An Interment Budget.


The writer is a BJP MP in the Rajya Sabha

First published on: 04-03-2009 at 12:26:01 am
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