INDIAN BUDJETBY A BANKRUPT GOVT

An interesting write up on Govt's mgt of fiscal deficit. The much awaited Interim Budget is out now. One of the key performance indicators of the Government - fiscal deficit, has been announced at 4.6%; much below the target of 4.8%. Using the tricks like spectrum auction, PSU dividends etc, the Finance Minister has tried to create an illusion that fiscal health is in good shape. However, the semblance of order is unlikely to last. Here is why. We all know about the Government's borrowings and use of bonds to facilitate the same. Like any other liability, this debt too needs to be serviced with interest and principal repayment once these bonds mature. As per an article in Firstpost, the quantum of interest and principal repayment liability regarding these bonds is more than the fresh borrowing by the Government. This means even if the Government uses all fresh debt, it won't be enough to repay the old one. Government's Liability Mounting Up *Projection But what is the Government actually doing with this borrowed money? As per Fiscal Responsibility and Budget Management Act (FRBMA), the Government should use this money to create assets in order to spur growth. However, we all know that all this money is mainly going to unproductive expenses like subsidies for energy, fertilizer sector. A recent addition to this list is Food Security Bill. The fiscal profligacy of the Government along with policy paralysis leaves little prospect for growth. Hence, the Government is just increasing debt without ensuring a growth in future. Needless to say, this trend cannot continue forever. Rising government debt, high inflation and slow growth will finally spoil sovereign credit profile. This will impede Government's borrowing and repayment ability, further fuelling the mess in the economy. There is further opportunity cost related to this practice. High Government borrowing limits funds for Private sector and leads to a rise in the cost of funds required for investment. Along with slow demand and delayed project approvals, the companies are putting investment plans on hold. No wonder the economy seems to be stuck in a vicious circle. A solution to this could be disinvestment and Privatization. The same is likely to lead to operational efficiencies and better growth prospects. However, the Government has not seen much success with it and instead resorted to tactics like special dividends from PSU companies (in which it is majority shareholder). Thus, instead of improving their prospects, the Government is stripping PSUs of their cash and future investment opportunities. To conclude, with slowing growth, focus on vote bank politics and lack of investment activity, there seems to be no way out of the huge debt trap that Government is stuck into. The recent estimates for a lower fiscal deficit and promises in the interim budget are unlikely to be kept. Meeting targets on paper with some quick fixes will make the economic issues more chronic. It's time that the Government takes some serious measure for fiscal consolidation