At our CFO Roundtable in Jodhpur, Vivek
Aggarwal of CIBIL raised a pertinent point on
the issue of Government finances. He correctly
observed that Government expenditure is
presented as a percentage of Gross Domestic
Product, as are the various measures of
deficits. He proposed that we undertake an
exercise, if only to present a more realistic
perspective, using the methodology adopted by
commercial enterprises – simply put, that we
look at these metrics as a percentage of
revenue. This paper will provide some data along
these lines but perhaps more importantly, raise
concerns that the current state of fiscal
affairs has perched India’s economy
precariously. Frankly, it could go either way,
and a disaster might not be far.
In 2006-07, tax and other revenue receipts
amounted to Rs 4.3 trillion while total expenses
were Rs 5.8 trillion, implying a fiscal deficit
of Rs 1.4 trillion. When measured against GDP,
the deficit amounted to 3.3 per cent1. From
conventional benchmarks, this would appear to be
an acceptable figure. However, when measured
against revenue, the deficit was 32 per cent.
This was funded largely by Government borrowings
of Rs 1.1 trillion (other capital receipts like
loan recoveries and fresh deposits in Government
saving schemes, contributed the balance).
Effectively therefore, the Government over-spent
its income by a third and financed one-fifth of
its expenditure through borrowings. Over a
period of five years, this situation changed
drastically – for the worse.
The capital flows that
have dried up are not
so much a reflection
of global market
conditions as the Government pretends as they
are a reflection of a fall in investor
In 2011-12, Government revenue stood at Rs
7.7 trillion while expenses were Rs 13.2
trillion. This amounted to a shortfall of Rs 5.2
trillion which again had to be funded largely by
borrowings (Rs 4.4 trillion). As a percentage of
GDP, the fiscal deficit was 5.9 per cent but as
a percentage of revenue, it was 68 per cent.
Effectively therefore, the Government now
borrows almost two-thirds of what it earns and
one-third of what it spends.
The Treasury assumes that tax receipts will
continue to rise as the economy expands.
Therefore, over time and through prudent
management of costs, it may be possible to
reduce the income-expenditure gap as a
proportion of GDP. But the reality is that a
large chunk of Government
expenditure comprises committed payments –
for instance, interest payments at Rs 2.8
trillion, defence spending at Rs 1.8 trillion
and appallingly, subsidies at Rs 2.2 trillion.
None of these can be tinkered with in the
context of India’s political structure.
Additionally, the welfare programmes instituted
over the past few years will entail spending
commitments to service the NREGS, oil and
fertilizer subsidies and now, the food subsidy
bill which will cost Rs 1.5 trillion per annum.
This alone is three times the NREGS expenditure.
The total liability of the Union of India,
which encompasses sovereign debt, pensions and
savings liabilities, stands at Rs 51 trillion,
about 65 per cent the country’s GDP. Over the
past few years, this has increased by Rs 4
trillion or thereabouts every year, largely
matching the fiscal deficit. Servicing this debt
entails an annual outgo of Rs 2.8 trillion, more
than half the deficit itself. Basically, the
Government of India spends about 70 per cent
more than it earns, and half of that is simply
to repay interest commitments on past
borrowings. It rarely repays principals and
simply borrows more to roll over past loans when
they come up for renewal. Even from generous
benchmarks, this situation can only be described
as an internal debt trap.
Governments manage to chug along when
economic growth is high and tax revenues are
buoyant – fiscal indicators measured as
percentages of GDP can then be made to look
good. But in the wake of a slowing economy and
consequently falling revenues, this logic
unravels and ‘committed expenditures’ begin to
hurt. As the figures demonstrate, the present
fiscal situation borders on being calamitous.
Euro crises and global financial markets
aside, the fact is that our national finances
have been badly managed. Even if the global
economy were to recover, Indian policy makers
would have a lot of hard thinking to do. The
capital flows that have dried up are not so much
a reflection of global market conditions as the
Government pretends and is painstakingly trying
to convince those that will listen, as it is a
reflection of a fall in investor confidence.
Investors understand that mismanaged budgets
lead to price instability, falling investment,
and eventually a decline in future growth. They
see no appetite within the Government to
undertake reforming measures that will alleviate
these factors and therefore, attract capital.
They realise that with the Government in
dormancy, India is quickly losing the plot.
To make things worse, recent decisions by
Ministries smack of arrogance. The Vodafone tax
case and the denial of Reliance’s exploration
expenditures previously agreed upon have
frightened not only international companies but
created mistrust among foreign Governments. A
country which cannot be trusted is hardly one
that would generate interest to do business
with. This is starkly corroborated by India’s
own business community, which is now actively
pursuing investment opportunities offshore, as
there seems little faith left that things will
improve in a hurry on the domestic front.
Ultimately, most problems boil down to
Government finances and there is no choice but
to address this on a war footing. India has a
battle on its hand – of an economic nature – and
the situation has to be dealt with accordingly.
Anything less and we run the risk of a very
serious slippage from where recovery will not
only be hard, but also painstakingly slow.