A Poisoned Chalice

THE new Government is soon to put its money where its mouth is: July 22, Budget day, is eagerly awaited, by Indian decision-makers and other, more recent 'stakehol-ders' in the economy, namely multilaterals and foreign investors. India's disempowered, too, expect a better deal, however uninteresting this may be to the English language press.

All these expectations, but one, huge, constraint. The new Government has inherited a poisoned chalice. For all the claims made by Manmohan Singh, the public finances are insolvent. So is the trade account. We are indebted, at home and abroad, and have managed our domestic and international finances unwisely.

Hyperbole? Was not India on the fast track to becoming an Asian tiger, poised to leap into a high growth era? Let's look at the evidence. First the infamous budget deficit problem. This, allegedly, was Dr Singh's great success. Not so, unfortunately. Dr Singh had an uncanny ability to play down reality and broadcast projections as truth. This is now evident when we look at the record.

Deficits can be measured in many ways. The most used measure is that of the fiscal deficit. Dr Singh claims this has fallen in his time, and P. Chidambaram wishes to reduce it further. Great! But does this tell us anything about fiscal solvency? Governments borrow to finance their investment expenditures, hoping that the returns from investments will pay off debt incurred for that purpose. Yet, governments, like firms and households, must be able to control their consumption spending. If you consume more than you earn, you will eventually go bankrupt. In public finance, an indicator of this is the revenue deficit which measures the difference between the Government's current expenditures and revenue (known as the revenue account). For the last 16-odd years, we have had a revenue deficit. Did the last Congress government reverse this? No. Things got worse. And while the projections Dr Singh touted to an acquiescent media kept predicting a fall, this, in fact, never happened. The revenue deficit continues to be high.

Why? The answer lies in the componentsof Government spending. The main ones are: current administrative spending, interest on debt, and subsidies. Did Dr Singh cut  these? No. Current administrative expenditure is a high but constant proportion of total Government expenditure and has been so for a while. While Chidambaram's desire for austerity is reasonable, so too is the protest against it, as this issue cannot be tackled in isolation.

Indeed, it was the other items that Singh promised to cut and did not. Subsidies in India are mainly given on food, fertilisers and export promotion. The only subsidy that has been controlled in any meaningful sense is export promotion! This from a government allegedly committed to export growth. Certainly, a pro-poor United Front Government can think of better ways of providing cheap food and fertilisers. But, this cannot be done in the short run. And the recent outcry about the petrol price hike shows the rich only want subsidies to the poor cut.

Can the new Government raise revenues? Certainly, the last Congress regime did not. Dr Singh's great tax venture, presumptive taxation, was an abysmal failure. Personal taxes form a ridiculously small proportion of total tax revenue and raising more will require an overhaul of the tax system. This will be difficult to achieve by July 22, if the Congress could not do it in 30 years. Raising indirect and corporate taxes will send negative signals to the market. Not many options here.

What about debt? The debt management record of the last government is inertial, incompetent and inept. Debt commitments account for over 90 per cent of the revenue deficit. On the international front, it now appears the Congress government did not solve the 1990 debt crisis, it merely postponed it. Foreign debt commitments averaged $6-7 billion in the last two to three years. However, this was achieved by backloading commitments to the present time. As a result, India has commitments of $14.5 billion this year and $13 billion next year should all go well. This is a crushing legacy, and a pernicious one.

But, what about tigerisation? Was not India to pay for this through enhanced exports. These are false expectations, fostered by Dr Singh's government and its acolytes. Exports are growing by about 20 per cent. However, imports are growing by about 25 per cent. The obvious implication is that the trade deficit gets worse. And exports use more imported inputs now than in the pre-reform period. So no cheer on this score, either.

Going by pre-budget comments in the English language press, the elite beneficiaries of the poisoned chalice want social spending to be cut. No rise in petrol prices but surely, there is room to be 'prudent', when it comes to mid-day meal schemes for poor children? I have every confidence that the present Government will not do this. This would be political suicide and a betrayal of the constituency which supports the coalition. The Government as a whole will need to address the question of reform seriously, recognising the problem as a long-term one. Indications are that this may happen and there is room for some sensible reform, a slimmer Government and, with decentralisation, more efficient and better targeted welfare and investment spending. All this will take time. But, for goodness sake, let us stop worrying about "Manmohan Singh's achievements being frittered away". There is little to fritter away and we have to stop bankrupting the country in the name of reform. We have to start paying for yesterday's fried chicken, and soon.

(Dr Rathin Roy is a political economist at the University of London)