Undoubtedly the reckless current account deficit of $339 billion in the nine years of the UPA rule has directly hit the Rupee unconscious. The CAD is the proximate cause of the Rupee’s disgrace, but not the only cause. Fiscal deficit is as much a culprit. Fiscal deficit is the excess outgo of government over its revenues. The deadly combination of huge current account deficits and high fiscal deficits have put the Rupee on the ventilator. See the fiscal deficits record of the UPA Government. In its nine-year rule, the UPA Government has incurred a fiscal deficit of over Rs 27 lakh crore -- of which it incurred Rs 22.66 lakh crore in the last five years at an average of Rs 4.5 lakh per year against the average of Rs 1.35 lakh a year in the earlier four years. The government’s alibi for the huge deficit of almost Rs 23 lakh crore in the last five years is the stimulus it gave to the economy by cuts in excise and customs tariff because of the global meltdown in 2008.
Because of the tax cuts, the revenue deficit shot up to Rs 16 lakh crore in five years averaging over Rs 3 lakh a year against the average of Rs 0.75 lakh in the first four years. The stimulus given in 2008 is still on, partially. See how this has robbed the nation, imposed high fiscal and huge current account deficits, eroded the Rupee’s value and benefited only the corporates.
Rs 30 Lakh crore revenue foregone
The Statements Revenue Foregone, annexed to each annual budget, details the tax waivers given by the government since 2006-7. In the nine-year UPA rule the tax waivers have accumulated to Rs 30 lakh crore! In the two years before the stimulus in 2008, the waiver averaged Rs 2.6 lakh crore a year.
But thanks to the stimulus, it almost doubled Rs 5 lakh crore each year for the last five years. Against the budget revenue deficit of some Rs 16lakh crore during the UPA’s nine years, the tax foregone is Rs 25lakh crore! The rationale for the stimulus was that the economy, under recessionary stress, needed support. But surprisingly the corporate profits were more in the stimulus period than before. The corporate profits were 11pc of the GDP in 2005-6, before the 2008 meltdown, when the GDP growth was also one of the highest – 9.5pc. Against this base year numbers, the corporate profits to GDP ratio rose up year after year thus: 12.94pc [2006-7], 14.26pc [2007-8] 11.86pc [2008-9] and 12.71pc [2009-10] and 12.15pc [2010-11]. The excess over the base year’s gains of the corporates during the five years was Rs 4.8 lakh crore. This meant that the corporates had swallowed the substantial stimulus meant for the economy. Significantly, before the stimulus [2008-9] the average GDP was 9pc, in 2008-9 it was 6.7, after the stimulus it averaged 9pc till 2010-11. Only later it declined. Obviously the stimulus was a kneejerk reaction, not entirely based on merits, given the good performance of the corporates and GDP during the six years from 2006-7 to 2010-11. The UPA’s latest Economic Survey [2012-13] too laments about the huge tax foregone [p66-68] and counsels “there is merit in limiting” the tax waivers.
As far back as in 2005, both Manmohan Singh and Chidambaram swore that they would withdraw tax cuts but didn’t. Not doing so then and not fully cutting the stimulus in 2009 amounted to a criminal mismanagement of the economy. The weak performance of the economy from 2011-12 itself was partly because of the huge fiscal deficit of Rs 12lakh crore occasioned by the stimulus tax cuts. On top of it now is the proposed expenditure for attempting an UPA victory in the 2014 elections at public cost like the Food Security Bill, which threatens to escalate the fiscal deficit by Rs 2 lakh crore more each year. This creates the market perception that the UPA is recklessly keen for power even at the cost of national bankruptcy. Why will the Rupee not collapse? Move on.
Tax cuts invite high CAD
The stimulus conceals a much greater evil than just loss of revenue. The stimulus cut in customs tariff in 2008 -- already down to one half in the last decade -- made imports cheap. Result, the capital goods import surged in the next five years [2008-9 to 2012-13] to $407 billion. In the previous four years it totalled only $180 billion. Obviously, the customs rate cut has to do with enlarging the flood gate of capital goods import. The customs collection, which was Rs 1 lakh crore in 2007-8, came down to 0.83 lakh in 2009-10 -- that is less by over 17pc - even as imports rose from Rs 8.4 lakh crore [2007-8] to Rs 13.74 lakh crore [2009-10] by over 56pc. Obviously, the surge in the import of the capital goods was stimulated by the customs and excise stimulus in 2008. As demonstrated yesterday (Monday), surging capital goods imports decimated the domestic capital goods industry and forced the GDP down. Thus the stimulus tax cuts have hit the economy in every way – increased the fiscal deficits sky-high, imposed huge current account deficit and sent the Rupee to the ICU. But that is not the end of the mischief.
CAD causes huge debts
Even as the post-2008 budget deficits added `21.6 lakh crore to the public debt, the current account deficits necessitated huge external borrowing. This is despite the fact that during the UPA rule, the investment flow into India was unprecedented. FDI inflow into India during the nine years was $205 billion. Deducting the investment outflow of $102 billion from India, the net inflow of FDI was $103 billion. The net FII inflow into stock markets was $124 billion. The two added $227 billion to the forex kitty, but that was short of the current account hole of $339 billion. Huge external borrowing became inevitable. Including the risky short-term debts, which rose by 17 times from $4billion to over $70 billion, the external debts leaped by $288 billion during the UPA regime to $396 billion. The huge rise in investments and debts caused a four-fold rise in the net outgo of the income on investments and debts from $4 billion to $16.5 billion. With the current account deficit of $339 billion eating away most of the investment inflow [$227 billion] and additional debt [$288 billion], the forex reserves grew only by $180 billion to $292 billion. With the Himalayan current account and fiscal deficits continuing, escalating debts, increasing servicing spend on debts and investments and disproportionate short-term debts, the statistical forex reserve of $292 billion barely conceals the semi-external bankruptcy that has put the Ru pee in ICU.
Culture saves India
But what has ultimately saved India from internal and external bankruptcy is not fully evident in the public discourse. How were the fiscal deficits financed? Simply by the government issuing bonds to the commercial banks and the Reserve Bank and borrowing. The government could borrow within India because the traditional Indian families ‘safely’ bank their savings. They deposit close to Rs 10 lakh crore a year in the banks, which saves India from internal bankruptcy. But how is the bankrupting CAD really met? The truth, an untold story, may shock. It is the ‘remittances from the Indian workers for family expenses’ and ‘local withdrawals’ from the non-resident Indian accounts that has saved India from external insolvency. The forex contributed by Indian families totalled $335 billion during the nine-year UPA regime, almost equal to the CAD. Not a single dollar of this remittance is returnable. It bears no interest. This huge lifeline remittance is not the product of economics laws or the government policies. It is the traditional, cultural gift to the Indian economy. Had the traditional Indian families, struggling against modern individualism, not held together, would there have been such remittance?
Never. More. If the Indian workers did not remit for the maintenance of their kith and kin, besides the loss of the $335 billion lifeline for India, the state will have to fend for them. Has the Indian establishment discourse ever noticed this culturally devised protection to the economy? The relation-based nature of the Indian society makes this remittance culturally mandatory. This would not happen in contract- based societies like those in the West. Yet the government is making laws and the public discourse is striving hard to atomise the Indian family and society and turn it into a contract-based one. The establishment takes this lifeline for granted, perhaps not even conscious of it. But it tom-toms the investment inflows and debts.
The final part of the story will show how naive or criminally negligent the UPA Government has been in allowing a large part of the huge current account deficit to run contrary to India’s strategic interests.
(To be concluded)
S Gurumurthy is a well-known commentator on political and economic issues.