India’s fiscal deficit has reached worrying proportions. During the first six months of the year it had already crossed 65% of the year’s target of Rs 5,13,590 crore. Fiscal deficit is the difference between what the government earns and what it spends.
The government’s effort to raise revenues has barely gone anywhere. During the half of the year only 40% of the targeted revenues had been raised. The recent 2G auction was a damp squib and the disinvestment process has barely started.
So what is the way out? “You know you always find some way out. Nobody quite believes the fiscal targets as yet. It is still all about hope and let’s see what happens in the next few months,” says Ruchir Sharma, the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management. “Only thing that which makes me sound a bit positive in terms of hope that at least they have recognised the problem. Till a year ago, even till April, there was no recognition of the problem. And that to me is at least a positive that we can look on.”
Given the slackening finances of the Indian government there has been a lot of talk about the rating agencies downgrading India, something, if media reports are to be believed, even the finance minister P Chidambaram is worried about.
But Sharma feels the threat is majorly overblown. “I just feel this fuss about that is really overdone to be honest with you because who cares! They (the rating agencies) are far behind, so whether we get downgraded or not, to me it just doesn’t matter and that doesn’t change anything for us,” says Sharma.
Explaining his logic Sharma says “Let me put it this way. If growth is less than 5% etc, that would be horrendous. But I think the reasons for the downgrade are already well telegraphed. If it happens it will be a formality. It will be a short term negative undoubtedly.”
The other big worry in India right now is inflation. “Commodity prices are generally down globally and that should help inflation. The problem is the same that unless we put an end to this populist surge in terms of spending you can’t get a meaningful decline in interest rates,” says Sharma.
“That really is at the core of the problem as far as inflation and interest rates are concerned. How do you put an end to that culture? That genie is out of the bottle. How do you put it back in?,” he asks.
The main problem that remains for inflation is just that there is too much government spending going on and too much of it is inefficient, feels Sharma. “This at a margin is a problem that is getting better,” he adds.
But the real test for the government would be whether they are able to put off the food subsidy kind of schemes. As Sharma puts it “To me the real signal will come if they back down on these populist schemes. Such as the whole food subsidy bill etc. The real fear that I have now is that we do all this now and this is only preparing for another populist scheme at the end of it, at the first sign when things are manageable or things are brought under some control. The fact that they can postpone such things or put them completely away will be a very positive sign. But until then I don’t know.”
The realisation that needs to come in is that government spending as a share of India’s gross domestic product is too high. “You can’t carry on this way. Not because it’s bad thing to do but you can’t keep writing cheques which the exchequer can’t cash. To me that is the bottomline. That spending now for a country of India’s per capita income level of $1500, government spending as a share of GDP is too high.”
Government scams have also been a major issue in the recent past. Sharma feels that this does impact India’s perception in the West. “For them it reinforces the fact about two issues that they have had with India. One is the fact that it is a tough place to do business in. And that shows up in all the metrics like the ease of doing business that World Bank and IMF put out, India ranks in the bottom quartile of most of these things. It also highlights that in India it is very difficult to do greenfield projects and set something up. You might as well be a partner with one of these guys who can get stuff done in India,” says Sharma. “But this is something that people have known and this just reinforces their perception,” he adds.
The interview originally appeared in the Daily News and Analysis on December 3, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])