{"id":1200,"date":"2012-11-14T12:56:13","date_gmt":"2012-11-14T07:26:13","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1200"},"modified":"2012-11-14T12:56:13","modified_gmt":"2012-11-14T07:26:13","slug":"1200","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/11\/14\/1200\/","title":{"rendered":"Deficit Crisis: Hope Chidamabaram is praying to goddess Lakshmi"},"content":{"rendered":"

\"\"<\/a>
\nOne of the many Diwali traditions that have come up over the years is the idea of leaving the doors and the windows of the house open. This is done to facilitate the entry of Lakshmi<\/i>, the goddess of wealth, into the house.
\nThe Union Minister of Finance, P Chidambaram, hopefully is a believer, and had left the doors and windows to his house open yesterday, in the hope that Lakshmi <\/i>will come into the coffers of the government he is a part of.
\nThe way the finances of the government of India are placed, it\u2019s time for\u00a0Chidambaram\u00a0to do what most Indians do when they are stretched and stressed. Pray to\u00a0god. And hope for the best.\u00a0So if he isn\u2019t a believer it\u2019s high time he becomes one and starts praying that Lakshmi <\/i>doesn\u2019t give the government a slip.
\nThe fiscal deficit of the government of India for the year 2012-2013(i.e. the period between April 1, 2012 and March 31, 2013) has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
\nTargets need to be met and it\u2019s unlikely that the government of India will meet the fiscal deficit target it has set for itself. As the Kelkar committee on fiscal consolidation recently pointed out \u201cA careful analysis of the trends in the current year, 2012-13, suggests a likely\u00a0fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent \u00a0of GDP, if immediate mid-year corrective actions are not taken.\u201d The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore.
\nIn order to control this burgeoning fiscal deficit the government can do two things, increase its income or control its expenditure. But some recent developments show that the government is more than faltering on both the fronts.
\nTake the case of the auction of the 2G telecom spectrum. The government expected to raise Rs 30,000 crore from this. But the actual number is nowhere near that. The other big entry into the revenue figure was supposed to come from the disinvestment of shares that the government holds in public sector enterprises. Not a single rupee has been raised on that front.
\nAlso what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the\u00a0
Business Standard<\/a>\u00a0\u201cBy end September the government\u2019s tax receipts amounted to less than 40 per cent of the year\u2019s Budget target.\u201d
\nSo things are looking bad on the income front. The other big headache for the government has been the fall of the rupee against the dollar. As I write this one dollar is worth around Rs 55.
\nAnd this means increased expenditure on the oil front. Oil is sold internationally in dollars and when rupee loses value against the dollar that means Indian oil companies have to pay more in rupee terms to buy the same amount of oil. Currently the price of crude oil for the Indian basket is at $106.09 per barrel. At Rs 55 to a dollar this means Rs 5835 per barrel in rupee terms. Compare this to October 4 when the rupee touched a recent high against the dollar. On that day one dollar was worth Rs 51.5. At that price crude oil would have been at Rs 5464 per barrel in rupee terms, much lesser than what it is today.
\nHence, as rupee loses value against the dollar, the oil bill goes up. This wouldn\u2019t have been a reason for worry if products made out of oil i.e. petrol, diesel and kerosene, were sold at their market price. But they are not. The government subsidises the oil marketing companies (OMCs) for selling diesel and kerosene at a loss. It also subsidises the OMCs for selling cooking gas at a loss. As the rupee loses value against the dollar it means increased losses for the OMCs unless prices of the products they sell are raised. And in the process it also means increased expenditure for the government and hence a greater fiscal deficit.
\nAlso recent numbers released by Controller General of Accounts project a worrisome picture. Fiscal deficit for the first six months of the year (i.e. between April 1 and September 30) was at Rs 3,36,00 crore. This means that for the first six months of the year the fiscal deficit stood at 65.6% of the estimated fiscal deficit of Rs 5,13,590 crore. This clearly is not a good sign. If the government continues at the same pace it will end up with a fiscal deficit of Rs 6,72,000 crore or 6.7% of the GDP.
\nA high fiscal deficit is worrying. As the Kelkar report points out \u201cHigh fiscal deficits\u00a0tend to heighten inflation, reduce room for monetary policy stimulus,\u00a0 increase\u00a0 the risk of\u00a0external sector\u00a0 imbalances and dampen private investment, growth and employment.\u201d
\nOver and above that a high fiscal deficit can also lead to a \u201clikely…sovereign credit downgrade and flight of foreign capital.\u201d As foreign money leaves India this would put further pressure on the rupee against the dollar, leading to a higher oil bill and in process a higher fiscal deficit. So a higher fiscal deficit will lead to an even higher fiscal deficit.
\nHence, the government has to either increase its income in some way or control its expenditure. One way of doing that is controlling on subsidies which can be done by increasing prices of oil products as well as fertilizer. But that is unlikely to happen given that it is politically\u00a0enviable.
\nSo that leaves the government with only one way out and that is to get aggressive on the disinvestment front. Very little action has been seen on that front. But with the government getting a massive amount of bad press over the last few months for being involved in a variety of scams, whether investors pick up shares in public sector companies that the government decides to disinvest, remains to be seen.
\nIn this scenario the government\u2019s one and only hope is the Life Insurance Corporation (LIC) of India. The government can direct LIC to pick up shares of companies it decides to disinvest. When it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March).
\nAt that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that\u2019s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest.
\nTill then Chidambaram can at best continue to pray to\u00a0Lakshmi,<\/i>\u00a0the goddess of wealth and hope that it blesses the government.
\nThe
article<\/a> originally appeared on www.firstpost.com on November 14, 2012.
\n(Vivek Kaul is a writer. He can be reached at\u00a0
vivek.kaul@gmail.com<\/a>)<\/p>\n","protected":false},"excerpt":{"rendered":"

One of the many Diwali traditions that have come up over the years is the idea of leaving the doors and the windows of the house open. This is done to facilitate the entry of Lakshmi, the goddess of wealth, into the house. The Union Minister of Finance, P Chidambaram, hopefully is a believer, and … <\/p>\n

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