High Cost of Fiscal Mismanagement

Budget and Money Market THERE arc several proposals in the central budget for 1998-99 which will have implications for the financial markets, the most significant amongst them being the proposed fiscal deficit and the means of financing it, In this context, it may be mentioned in passing that the financial markets would be by now nursing substantial scepticism about the government's ability to rein in fiscal deficit as professed in initial budgetary projections. The last year's slippage in gross fiscal deficit from the budgeted 4.5 per cent of GDP 10 the actual of about 6.1 per cent was not a unique one; it has been happening now almost continuously during the past five years, essentially because the fiscal reforms have taken the path of a narrow construct based on a mainstream stabilisation and structural adjustment programme, without an integrated long-term strategy of resource mobilisation (by assigning appropriate roles for direct and indirect taxes and protection rates on export- import trade), restructuring of public expenditures, comprehensive reforms of public sector enterprises and sustainable levels of domestic and foreign borrowings. The rash populist measures taken so far on an all round slashing of direct tax rates and haphazard reductions in indirect tax rates have made it impossible for the government to achieve any semblance of fiscal balance. The budget for 1998-99 has placed the fiscal deficit at 5.6 per cent of GDP which is only marginally lower compared to 6.1 per cent in the previous year. In absolute terms, the gross fiscal deficit proposed at Rs 91,025 crore for 1998-99 stands at 36.4 per cent higher than what it was two years before, namely, Rs 66,733 crore in 1996-97, though it is only 5.4 per cent higher that in 1997- 98 (Rs 86,345 crore), Apart from very many complex issues, a danger inherent in the expansionary fiscal stance of the 1998-99 budget without the supporting real resources is the near certainty of revenues falling behind the targets and expenditures outstripping the targets, thus giving rise to further stretching of the borrowing needs. As it is, the borrowing programme set out in the budget can only be called massive: Rs 48,326 crore in net terms and Rs 79,376 crore in gross terms as against Rs 40,494 crore and Rs 59,637 crore, respectively, in the previous year. What is more worrisome is that net borrowings through medium and long-term securities (including market borrowings), i e, other than 364-day TBs, are budgeted to rise by Rs 23,443 crore or by 77 per cent from Rs 32,488 crore to Rs 55,931 crore. The higher borrowing programme and the persistence of borrowings from the RBI through large subscriptions to market borrowings as well as ways and means advances are sure to have serious implications for interest rates, as also for monetary and general economic stability.