Calcutta Notebook
B J

International rating agen cies have continued with their negative outlook on India despite the present round of reforms heralded by opening of FDI in retail. Major reason is the increase in fiscal deficit of the government. High level of fiscal deficit leads to inflation, promotes government profligacy, leads to devaluation of the currency and erodes the confidence of private investors. This leads to reduction in the growth rate.

But there can be other positive impacts of high fiscal deficit, however. Investment in highways leads to lower cost of transport as well as generates demand for steel and cement. This leads to higher growth rate. It is necessary to raise revenues for meeting these expenditures. It is best to raise these revenues via taxation. But it is justifiable to borrow and spend this money even though this leads to an increase in fiscal deficit.

There are two contrary aspects of fiscal deficit. Reduction in fiscal deficit leads to macroeconomic stability, attracts more private investment and helps raise the growth rate. On the other hand, higher fiscal deficit and more investment in infrastructure and other productive works also raises the growth rate.

This contradiction resolves itself if government expenditures promote private investment. For example, if the government incurs fiscal deficit to invest in roads it may attract more private investment. On the other hand, if the government incurs fiscal deficit to pay higher salaries to its employees; or to look the other way while money is being leaked from the coffers, then it may lead to reduction in investment and growth rate.

The dispute regarding fiscal deficit being good or bad arises for two reasons. First reason is that there are no clear measures for evaluating the quality of government expenditures. Often capital expenditures are considered to be 'good' and revenue expenditures are considered to be 'wasteful'. Thus it is seen that a road remains in dilapidated condition for the want of Rs one crore of repairs while a new road is constructed with an investment of Rs 100 crore. The repair of existing road is considered to be revenue expenditure while making a new road is part of capital expenditure. Other revenue expenditures such as on law and order also have a huge positive impact on investment. The law and order situation deteriorated in Kerala in the eighties. This led to local capital fleeing to other states. Keralite investors bought properties in Mangalore instead of Kottayam. The law and order situation was good in Karnataka. That enabled Kerala's capital and Kerala's workers to join in the making of productive assets in Mangalore. The law and order situation was not so good in Kerala and that prevented capital and labour to join in Kottayam.

Similar problem exists in schemes like Rojgar Guarantee Scheme. Many unproductive works are undertaken in these schemes such as tree plantation is done without making arrangement for giving water to the plants. Further, such schemes create the idea in the minds of the people that it is the government's responsibility to provide jobs. They spend Rs 100 sitting on dharna and do not invest the same Rs 100 to buy groundnuts and do some business selling them. The final impact of such government expenditures can be very negative.

The second reason for the dispute is that leakages from the coffers are not taken into account. Incurring fiscal deficit is harmful if the borrowed money is leaked and stashed away in Swiss Banks.

There is a need to take two distinct steps to sort the issue of fiscal deficit. First step is to improve the productiveness of the government expenditures. Some time ago advisor to the Finance Ministry Mr Vijay Kelkar had submitted a report to the government on tax reforms. One of the important suggestion he made was to do away with the categories of 'capital' and 'revenue' or 'plan' and 'non-plan' in respect of government expenditures and replace it with the categories of 'private goods' and 'public goods'. Those goods that can be acquired by an individual in his personal capacity such as food, health and education should be classified as private goods. Those services that cannot be obtained by the individual in his personal capacity and which can only be provided by the government such as defense, currency, educational testing and standardization, health research and epidemiology, etc. should be classified as public goods. The government should increase its expenditures on public goods since these are solemn responsibility of the state. The provision of high-quality public goods will spontaneously create an environment in which private investment will flow freely.

Second step is to rein in corruption and leakages from the government coffers. It is unfortunate that the Government is more focused on disproving the allegations of corruption raised by CAG, Kejriwal and Ramdev instead of treating the rot that has crept into the system.

The objective of the UPA Government seems to be to somehow attain high growth rate while looking the other way on corruption. The three objectives of UPA are corruption, high growth rate and garnering votes. These objectives are sought to be achieved by reducing fiscal deficit coupled with increased collection of revenues from one-time sale of spectrum and coal blocks. The logic appears to be as follows.

Frontier
Vol. 45, No. 30, February 3- 9, 2013

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