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High fiscal deficit a matter of alarm

Tara Shankar Sahay in New Delhi

ECONOMIC SURVEY

The Economic Survey 2000-2001 tabled before the Parliament on Friday emphasizes that 'the economy is currently in a difficult stage' and ' some problems of growth are likely to be faced in the coming year'.

Addressing the government's issues and priorities, it points out that because of irregular rainfall for the second successive year, 'agriculture growth has been low or absent in 2000-2001'.

Industrial growth seems to have slowed down and the sentiment for new investment has not improved.

According to the survey, the problem has been compounded by the persistence of high international oil prices and the slowdown of the American economy, which is likely to affect the rest of the world.

It says although the major industries of Gujarat 'have fortunately escaped the worst effects of the recent massive earthquake, the impact of dislocations on the growth process cannot be ignored'.

It underscores that it is therefore essential that the unfolding economic situation be watched and measures need to be taken to instill confidence in the economy so that the growth momentum of the 1990s can be improved upon.

Despite the positive response of economic agents to reforms, 'identifiable gaps in the reform process continue to cloud the long-term growth prospects of the economy, the survey points out, adding that the fiscal situation has worsened since 1996-97'.

It says outstanding liabilities (non-RBI) of the central government has risen to 51.8 per cent of the gross domestic product in 1999-2000.

More disturbing, it has been on an uptrend since 1996-97 when it reached a low of 46.4 per cent of the GDP. This, more than any other indicator, encapsulates the issue of fiscal unsustainability, while more conventional indicators serve to flesh out the picture, the survey underlines.

The central fiscal deficit has risen to 5.5 per cent of the GDP in 1999-2000, up from a low of 4.1 per cent of the GDP in1996-97.

The revenue deficit showed a similar pattern and at 3.5 per cent in 1999-2000 is now higher than the 3.3 per cent in 1990-91, it says.

It points out that though the primary deficit of 0.8 per cent of GDP in 1999-2000 is two percentage points lower than in 1990-91, this is primarily due to a 1.9 percentage point reduction in capital expenditure.

Interest payments have risen to 4.7 per cent of the GDP in1999-2000 from 3.8 per cent of the GDP in 1990-91. Though the budget had tried to revise these trends, sustained efforts will be required in this direction in the face of exogenous shocks like the Gujarat earthquake, the survey emphasizes.

It says: "The key problem affecting the Indian economy is the persistence of high fiscal deficit at both the central and state levels."

There is need to bring down the overall central and states gross fiscal deficit of 10 per cent of the GDP.

It says the persistence of high fiscal deficit has reflected itself in an increasing share of debt service in the expenditure budget of both the central and state governments.

Consequently, the ability of government at any level to undertake significant public investment has been seriously eroded.

This has led to a decline in the demand of Indian industrial goods. The lack of public investment has also slowed down private investment in infrastructure.

The continued high borrowings, as a result of the high fiscal deficit, has also kept real interest rates high in the economy.

Thus, industry faces extremely high real interest rates of 8 per cent to 10 per cent, which would be among the highest in the world, the survey notes.

It is, therefore, difficult for private industry, both foreign and domestic, to undertake new investment with any degree of confidence.

The key area of action, for instilling confidence in the economy, pertains to a credible medium-term programme for fiscal improvement.

"This has acquired new urgency at this juncture," the survey points out.

Economic Survey 2000-2001
Budget 2001
Money

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