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Budget 2015 expectations from M.R. Venkatesh

At the core of the imbalance in our Central Budget is the interest bill arising out of a gargantuan borrowing program that has lasted well over three decades. Readers may be shocked to note that for every Rupee spent by the Central Government, approximately one-fourth is only on interest.

As the Finance Ministry gears up for the presentation of Budget 2015-2016 in February, we would shortly begin witnessing a flurry of activity. The usual suspects will crawl out of their kitchen sinks into the full glare of television studios to begin their usual [and outdated] sermons. Anchors, highly economical about economics, would “discuss and debate” the state of Indian economy, its problems and possible solutions.

The print media, not to be left behind, would come with its share of editorials, guest columns and opinions from such self-proclaimed experts. Lobbying will begin right earnest. What cannot be lobbied in secret will be done through advertorials.

“India requires more investment in this globalised world,” the first pundit would say. After nodding in agreement, the next would seemingly counter with: “It is the quality of investment that counts – the bang for the buck you know.” The third one would nod his head sagely and offer his two-pence of inane opinion: “Investments provided they propel the idea of India with inclusive growth.”

An unsuspecting audience will be left none the wiser post the show. But who cares? Anchors will play ball with such experts notwithstanding the occasional theatrics keeping in mind TRP ratings. What would be interesting to know is that some of these experts would demand more reforms when they as a part of Government could well have been part of the de-forms process!

In the process, the debate on economics will recede to the background. In this great game of self-delusion, cacophony would pass as serious discussion and debates, if any, will oscillate between not so subtle titillation and meaningless pontification.

Understanding the Budget Maths
Am I cynical? Am I being unduly pessimistic? Why this negativity even before the budgetary process has commenced?

The answer to this question is not far to seek. At the core of the imbalance in our Central Budget is the interest bill arising out of a gargantuan borrowing program that has lasted well over three decades. Readers may be shocked to note that for every Rupee spent by the Central Government, approximately one-fourth is only on interest.

For instance, in the Budget for 2014-15 the Finance Minister [FM] has projected an interest expenditure of Rs 4.27 lakh crore on a proposed Budget size of Rs 17.94 lakh crore.

Further, the Budget estimates a receipt of a mere Rs 2.07 lakh crore from Excise Duty and Rs 2. 16 lakh crore from Service tax aggregating to Rs 4.23 lakh crore. To put things in perspective, the entire collection of Excise Duty and Service Tax goes on to fund our interest expenditure!

In the alternative, if there were no interest pay-outs, we could abolish the Excise Duty and Service Taxes. Imagine the fillip that this could give to our economy, notably our manufacturing sector and small business which would thrive simply in the absence of a coercive tax machinery.

Whatever be it, the macro-economic impact of this imbalance on the Indian economy is unimaginable. When someone borrows even to pay interest, it is called a debt trap. Crucially, as our Government needs to borrow even pay its interest, it tweaks policies [like mandating banks to invest substantial amount of its deposits into Governmental Bonds] to suit the same.

In the process let growth of our economy be damned.

Apart from this, at the ground level, such borrowings by our Government leave very little money for private investment. This is technically called crowding out and stymies the growth of Indian economy. Also it is elementary economics that persistent borrowings of this magnitude increases interest rates making the Indian economy largely uncompetitive at a global level.

What is galling is that the total taxes that accrue to the Central Government for 2014-2015 is budgeted to be a mere Rs 9.77 lakh crore [the difference between the budget size of Rs 17.94 lakh crore and Rs 9.77 lakh crore is made by non-tax revenues and borrowings]. This implies that out of every rupee accruing to the Government as revenues, it proposes to spend half of it as interest!

All this is akin to a corporate paying 50 per cent of its total income as interest and yet hoping to succeed commercially. Given this state of affairs, one is certain that even Al-chemists would not succeed; to say nothing of Government.

Obviously, the huge debt contracted by the Government of India and the consequent interest payments arising out of such borrowings renders budgets dysfunctional.

Put pithily, interest bill for the Government is an eight-hundred pound gorilla in the room.

Yet, when did you last hear an FM expressing concern on this mother of all issues? When was the last time an FM mentioned, even in passing, about Governmental debt [and hence the resultant interest pay-outs] being unsustainable? Crucially, is there any possible solution within North Block to this convoluted issue?

In effect, given its size, interest pay-outs leaves very little elbow room for our FM. It is often remarked that even Jesus Christ had more elbow room after being crucified on the cross than our FMs. Yet, oblivious of this structural imbalance that reduces their potency, successive FM behave as if they are the Lord of all that they survey.

Ask the Right Question
That is not all. It may not be out of place to mention that the total debt of Central Government expected as at March 31, 2015 is Rs 62.22 lakh crore. Apart from the size one cannot complain provided the Government had created appropriate assets out of the same. Therein lies the rub and conclusive evidence of fiscal recklessness of successive Governments.

The Receipt Budget for 2014-2015 reveals that of this sum the Government has assets aggregating to a mere Rs 24.12 lakh crore leaving a sum of Rs 38.10 lakh crore as liabilities unrepresented as assets. This means that the Government would have to pay an interest without any – repeat any – assets and hence concomitant income.

Now let us look further. The assets available with the Government as mentioned above are not depreciated to reflect their current market value. Once this exercise is carried out, the sum representing the difference between liabilities and assets would necessarily balloon.

There is another dimension to this issue. Hidden in the total liability of Rs 62.22 lakh crore as mentioned above is a sum of Rs 1.88 lakh crore representing borrowing in foreign currency. This represents a mere 3 per cent of our total borrowings. But once again there is catch. This amount is computed at historical currency rates i.e. at rates when the borrowings took place and not the present exchange rates.

Given the depreciation of the Rupee this sum of Rs 1.88 lakh crore and the total debt of Rs 62.22 lakh crore and consequently the aggregate of liabilities not represented by assets [currently as pointed out above being Rs 38.10 lakh crore] would increase significantly.

This in effect could well be in excess of Rs 40 lakh crore on which interest pay out even at eight per cent rate of interest per annum works out to Rs 3.2 lakh crore. What adds fat to the fire is that this amount circulates within the economy without concomitant production, which in turn adds to inflation. Where is the question of production when assets do not exist in the first place?

What should surprise readers is that for the past decade or so, no FM has ever made any reference to this expenditure in their Budget speeches. Unable to tackle this monster of debt and interest, FMs have invariably ducked the issue and turned their attention to irrelevant ones.

Given the grave state of affairs, one can at best sympathise but surely not commend their approach.

But such obfuscation on such a serious issue is necessarily not desirable especially given the fact that there is no instant answer to this vexatious issue. But does that justify successive FMs of not even mentioning the issue of governmental debt in their Budget speeches and not taking the nation into confidence?

Let us face it. The Union Government is on the verge of a debt trap; its finances are precarious. Years of fiscal profligacy have taken their toll. Given this paradigm, one hastens to admit that getting rid of the baggage of the past in one stroke is next to impossible. But a beginning needs to be made somewhere, sometime.

For starters, an honest approach would be to ask correct questions: what is the state of the finances of the Union Government. What is the extent of its debt and its impact on the Budget of Central Government? Is this model of borrowing significant sums year after year sustainable? Can government continue to borrow in excess of Rs 5 lakh crore every year – and use that amount to pay interest? Crucially what is the debilitating impact of all these on our economy?

Once the right questions are posed, the answers will definitely follow. Till then we will continue our downward spiral.


Last modified on Sunday, 01 February 2015 18:26

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