## Modi govt is still paying for the over-borrowing sins of UPA

The finance minister Arun Jaitley managed to balance his numbers and meet the fiscal deficit target of 3.9% of gross domestic product (GDP) that he had set for this financial year. He has also projected a fiscal deficit of 3.5% of GDP for the next financial year, 2016-2017.

In the budget speech made last year, Jaitley had said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.
In order to project a fiscal deficit of 3.5% of GDP, Jaitley has made extremely optimistic assumptions on the revenue receipts front (basically the income of the government) and understated the likely expenditure.

Having said that he is also facing the problem of excess borrowing carried out by the previous Congress led United Progressive Alliance government. These borrowings are now maturing and need to be repaid.

 In Rs crore 2013-2014(Actuals) 2014-2015(Actuals) 2015-2016 (Revised estimates) 2016-2017 (Budget estimates) 1. Repayment of debt 162976 207517 250709 284694 2. Total Interest Payments 374254 402444 442620 492670 3. Total Debt Servicing(1+2) 537230 609961 693329 777364 4. Revenue Receipts 1014724 1101473 1206084 1377022 5. Nominal GDP 11272764 12488205 13567192 15065010 Debt Servicing Ratio (3/4) 52.94% 55.38% 57.49% 56.45% Debt Servicing Ratio(3/5) 4.77% 4.88% 5.11% 5.16%

Source: www.indiabudget.nic.in

As can be seen from the accompanying table, the repayment of maturing debt as well as the total interest that needs to be repaid on outstanding has been going up over the last few years.

How does the debt servicing number look? Debt servicing is defined as the amount of money a government spends towards repaying the debt as well as paying interest on the outstanding debt.

Any budget number should not be looked at in an absolute sort of way. Hence, in this case we look at the debt servicing ratio. This ratio is obtained by dividing the money spent towards debt servicing by the revenue receipts i.e. the income of the government. What the table clearly tells us is that the debt servicing ratio of the government has worsened over the years.

In 2013-2014, the debt servicing ratio was at 52.94%. In 2016-2017, it will be at 56.45%.

We can also calculate the debt servicing ratio as a percentage of the nominal GDP. It is clear from the table that this ratio has worsened as well over the years.

The actual number will turn out to be higher than this, given that Jaitley has made extremely optimistic assumptions when it comes to the growth in revenue receipts.

Further, the government expects to earn Rs 56,500 crore through the disinvestment route in 2016-2017. It expects to earn Rs 36,000 crore by selling stakes in the companies it owns. And it expects to earn Rs 20,500 crore by selling stakes in companies in which it has a minor share. This is referred to as strategic disinvestment.

The interesting thing is that 2015-2016, the government expects to earn only Rs 25,312 crore through the disinvestment route. A major portion of this has been picked up by the Life Insurance Corporation (LIC) of India. Not a single rupee has been earned through the strategic disinvestment route.

After taking this into account, it is safe to say that the government has made a fairly aggressive assumption on what it wants to earn through the disinvestment route. The chances of these numbers materialising in reality are low.

Hence, the debt servicing ratio is likely to higher in 2016-2017. This is majorly because of the huge expansion in government expenditure carried out by the previous Congress led UPA government. A higher expenditure meant a greater fiscal deficit, which in turn means more borrowing to finance the expenditure. Fiscal deficit is the difference between what a government earns and what it spends.

In 2007-2008, the fiscal deficit of the government was at 2.7% of the GDP. This jumped to 6.4% of the GDP in 2009-2010. In 2011-2012, the number was at 5.7% of the GDP. These huge fiscal deficits were financed through higher borrowing. And this borrowing now needs to be repaid. Meanwhile, the interest payments have also increased as the debt keeps accumulating.

This is one reason behind why Jaitley has made optimistic revenue receipt projections in the budget and understated the expenditure majorly. He needed to do this in order to come up with a 3.5% of GDP fiscal deficit number.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag on March 1, 2016