Govt can't spend out of the crisis

Everybody loves the fiscal deficit. The Left has always favored profligacy. Those who are considered to be on the Right—economic liberalizers and industrialists, for instance—also want that the Narendra Modi government should bid adieu to prudence. Drastic times, we are told, require drastic solutions, so don’t worry about the expenditure. As if it is possible to spend one’s way out of a crisis.

With the nationwide lockdown stopping economic growth and adversely affecting its tax kitty, the government has been forced to augment the gross market borrowing estimates for 2020-21 by 54 per cent, from the Budget estimate of Rs 7.8 lakh crore to Rs 12 lakh crore. The impact on fiscal deficit is pegged to be severe. The Budgetary estimate for the current fiscal was 3.5 per cent; now it could be anywhere between 5.5 per cent and 7 per cent.

Monetization and higher fiscal deficits are no longer considered bad by top experts. Former Reserve Bank of India governor Raghuram Rajan is for it. So also is Confederation of Indian Industry (CII) president Vikram Kirloskar. “With economic activities being restricted for over 50 days now, the negative impact on the economy is expected to be even more significant than what we had earlier anticipated. This needs to be offset by a large fiscal stimulus so that jobs and livelihoods are protected,” he said.

The cost of the immediate “substantive” stimulus package that the CII wants: Rs 15 lakh crore or 7.5 per cent of GDP.

Soumya Kanti Ghosh, chief economic adviser, State Bank of India Group, also wants the government not to be too fussy about public finance. “At this point, we should not worry too much about fiscal deficit numbers, we need to provide support to our industry so that the economic impact of the lockdown can be handled,” he told IN.

It needs to be mentioned here that the fiscal deficit is not some fancy number economists play with; it is a measure of excessive government expenditure. If government expenses go up once in a while, it would be understandable and forgivable; but a permanent and rising deficit is symptomatic of not just the deep fissures in body-economic but also the unsoundness of the principles involved in it.

Why should government spend more than it gets in revenues, and that too year after year? Would any householder or housewife do that?

As it is, successive governments have mauled and mangled the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Originally, it intended to limit the fiscal deficit to 3 per cent and eliminate the revenue deficit—the difference between income and revenue expenditure—by March 31, 2008. The amended FRBM Act aims “to limit the fiscal deficit up to three per cent of gross domestic product by the 31st March, 2021.” It doesn’t discuss the revenue deficit, an equally important indicator of government’s financial health.

In other words, fiscal responsibility has been compromised ever since the legislation to ensure it was enacted in 2003. Greater irresponsibility will make the FRBM Act null and void, in letter as well as in spirit.

Greater borrowings are bad enough; the government should try to scale down the expenditure and lower the borrowings as much as possible.

Money is required to revive the economy. For that, the government can expedite the sale of public sector undertakings and banks (PSUs and PSBs). These would be bold reforms, but if state governments can liberalize labor laws—the boldest of all liberalizing moves—the Narendra Modi regime can also sell PSUs and PSBs.

Besides, government coffers are already getting replenished because of the lower crude prices in the international market.

Therefore, there is no reason that the government should go on a spending spree and try to pump-prime the economy. As I said in an earlier article: Keynes is dead; there is no point in resurrecting him..