{"id":3242,"date":"2015-01-28T12:56:40","date_gmt":"2015-01-28T07:26:40","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3242"},"modified":"2015-01-28T12:56:40","modified_gmt":"2015-01-28T07:26:40","slug":"can-modi-govt-afford-to-run-a-higher-fiscal-deficit","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/01\/28\/can-modi-govt-afford-to-run-a-higher-fiscal-deficit\/","title":{"rendered":"Can Modi govt afford to run a higher fiscal deficit?"},"content":{"rendered":"
<\/a>In his maiden budget speech finance minister Arun Jaitley had talked about the government working towards lower fiscal deficits in the years to come. \u201c My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17,\u201d <\/span><\/span><\/span>Jaitley had said in July 2014<\/span><\/span><\/span><\/span><\/span><\/a>, when he presented the first annual budget of the Narendra Modi government. Fiscal deficit is the difference between what a government earns and what it spends.
\nA lot has changed since then. The mainstream view that now seems to be emerging is that the government needs to spend more in the days to come, given that the private sector is not spending as much as it should.
\nOne of the first to advocate this view was Arvind Subramanian, the Chief Economic Adviser to the ministry of finance. In the Mid Year Economic Analysis Subramanian wrote: \u201cOver-indebtedness in the corporate sector with median debt-equity ratios at 70 percent is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 percent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector.\u201d
\nThis has led to a situation where banks aren\u2019t interested in lending and corporates aren\u2019t interesting in investing. In order to get around this problem Subramanian suggested that: \u201cit seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.\u201d
\nOn the face of it, this make perfect sense. It is being suggested that finance minister Jaitley should give up on the fiscal deficit target of 3.6% of the GDP for 2015-2016 and look to work with a higher fiscal deficit number. The logic offered is straightforward. The public liabilities of the central government(which includes the public debt and other liabilities like external debt reported at current exchange rates and liabilities of the national small savings fund) have been falling over the years.
\nThe public liability in 2008-2009 stood at 48.9% of the GDP. Since then the number has fallen to 45.7% of the GDP in 2014-2015 (estimated). The biggest fall has come under other liabilities which include national small savings fund and the state provident funds. These liabilities have fallen from 9.7% of the GDP to 5.8% of the GDP. The public debt has risen marginally from 39.1% of the GDP in 2008-2009 of the GDP to 39.9% of the GDP in 2014-2015.
\nOn the face of it, the public debt and liability numbers of the central government are in a comfortable range. All in all the simple point is that the government can spend more, run a higher fiscal deficit and look to finance that through higher borrowing.
\nBut these numbers do not take into account the public liabilities and debt of the state governments. How do there numbers look? Article 293(1) of the Indian Constitution empowers the state governments to borrow domestically. The public liabilities of the state governments stood at 26.1% of the GDP in 2008-2009. This has since fallen to 21.4% in 2013-2014. The public debt of the state governments has also fallen from 19.1% of the GDP to 16.1% of the GDP.
\nThe number that one needs to look at is the general government liabilities and not just the central government liabilities. As the latest <\/span><\/span><\/span>Government Debt Status Paper <\/i><\/span><\/span><\/span>points out: \u201cGeneral government [liabilities] represents the <\/span><\/span><\/span>indebtedness of the Government sector (Central and State Governments). This is arrived at by consolidating the debt of the Central Government and the State governments, netting out intergovernmental transactions viz., (i) investment in Treasury Bills by States which represent lending by states to the Centre; and (ii) Centre\u2019s loans to States.\u201d
\nAs can be seen from the accompanying table the general government liabilities were at 70.6% of the GDP in 2008-2009 and have fallen to 65.3% of the GDP in 2013-2014. This fall has primarily come about due to a fall in liabilities of the state governments.
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