India's fiscal policy seems to have the virtues of both a Swabian housewife and the Japanese Mrs Watanabe.
If the government's fiscal prudence, even in the face of a once-in-a-century pandemic, is symptomatic of Southern Germany's Swabian housewives known for their pragmatic ways of handling money, the decisive increase in capital expenditure over the past five years illustrates the financial acuity of Mrs Watanabe -- an archetypal housewife, who raked in substantial profits from currency trading when the Japanese economy was in a crisis.
Finance Minister Nirmala Sitharaman, the fiscal policy's chief architect, ensured that our financial housekeeping has all the necessary elements of thrift and spendthrift.
Even as critics pounce on her as the big villain of government spending for putting the State on lean rations squeezing education and healthcare budgets, she stuck sincerely to Rudyard Kipling's live-within-your-means philosophy to guard the nation's finances.
Five years into the job, not everyone is willing to concede that economies may be ruined due to austerity, but never due to prudence. So, early this week, she wrote a detailed post on X comparing the debt profiles of both the UPA and the NDA regimes, besides justifying that India's debt, including that of states, was safe and prudent, and that the country was in a better position than others. Taking a dig at the opposition's fiscally flamboyant poll promises, she thundered, "The truth is that our government's fiscal management is much better than that of the UPA despite facing the Covid-19 pandemic, in which substantial resources were used for relief efforts."
The nub of the matter is that, should there be a second term, it's highly unlikely that Sitharaman will indulge in any hyper-Keynesianism spending. The lady's not for turning, she'd perhaps say, channeling her inner Margret Thatcher.
If central government debt (including external debt), under the UPA rule between 2004 and 2014, grew 3.2 times from Rs 18.74 lakh crore to Rs 58.59 lakh crore, in contrast, it increased by 2.9 times to Rs 172.37 lakh crore in FY24 (RE) under the NDA regime. If the Centre's net market borrowings (G-Secs) shot up 4.5 times during the UPA regime, they rose by 2.6 times under the NDA government, notwithstanding the pandemic year excesses.
Likewise, if capex as a percentage of total expenditure (net of interest payments) fell to 16% in FY14 from 31% in FY04, under NDA government, it was back to 28% in FY24, increasing by 5 times from FY14 to FY24.
Sitharaman's defence of debt management comes amid a heated political debate over economic performance and the track record of the ruling and opposition parties. Both the BJP and the Congress have been digging in for ideological purity, defending their respective economic and fiscal policies and criticizing the other's mismanagement. Going one step further, the BJP even tabled a 'black paper,' in Parliament, accusing the UPA regime of undermining the country's macroeconomic fundamentals, while the Congress hit back citing price rise and unemployment.
Another trigger for Sitharaman's debt rant
One of the other triggers for Sitharaman's debt rant includes the promises made by the Congress. Last month, addressing a rally, Congress leader Rahul Gandhi made a poll promise to transfer Rs 1 lakh in the account of one woman from every poor household in the country if they win the elections. "How many welfare schemes would @RahulGandhi shut down to accommodate the fiscal cost of the 'Khata Khat' schemes?," she questioned, adding, "Will they borrow substantially for them, or will they raise taxes to fund them?"
Often, politicians propose welfare schemes increasing the size of the State, but rarely explain the source of the expense and if it'll increase the tax burden. Since no welfare scheme is self-funded, such measures may pile forcing the governments to cut a cheque they cannot cash. Precisely to avoid this, policymakers operate within set frameworks, in our case, the Fiscal Responsibility and Budget Management (FRBM) act.
It tracks sovereign debt using two metrics -- debt-to-GDP ratio and fiscal deficit. The former is the total government debt including central and states' borrowings and is expressed as a fraction of GDP, while the latter is the difference between the central government's total expenditure and revenue. Sitharaman's post gives a detailed snapshot of how India fared on these two metrics under both the UPA and the NDA regime.
Passed in 2003, the FRBM Act was to reduce annual deficits in a phased manner with a goal of bringing it down to 3% of GDP by March, 2009. It did decline to 2.5% in FY09, while the debt-to-GDP ratio fell from 83% in FY02 to 71% by FY08. But then, the global financial crisis struck in 2008 forcing the government to put fiscal targets on hold, while embarking on a stimulus festival to counter the crisis. But even after the crisis passed, fiscal consolidation was nowhere to be seen and the FRBM Act was amended subsequently. In its 2016 report, the FRBM Committee suggested a debt-to-GDP ratio of 60% by 2023, with central government debt coming down to roughly 40% and states' by 20%.
For six consecutive years between FY09 and FY14 under the UPA reign, the ratio of Gross Fiscal Deficit (GFD) to GDP stood at 4.5%. According to Sitharaman, it was between 4.5%-5% of GDP in three out of the six years, between 5%-6% in one, and more than 6% in two years. And there was no Covid-19-like crisis that needed such a quantum of fiscal expansion, she reasoned.
Fiscal deficit was sanded down to 3.5% of GDP by FY17, and stayed pat for three years. In 2019, it increased from 3.4% to 4.6%, as the crazy macro cocktail of slow growth and falling tax revenue hit the economy. Then Covid-19 struck in 2020 and as GDP and tax revenues crashed even as spending surged, deficit peaked to 9.4% of GDP.
As for NDA-I, the central government's debt stood at 52.2% of GDP in FY14, which was reduced to 48.9% in FY19 through gradual fiscal consolidation. Consequently, fiscal deficit reduced from 4.5% in FY14 to 3.4% in FY19. But following the pandemic, it surged to 9.2% in FY21, or 61.4% of GDP, but fell to 57.1% in FY24. The government went on to pursue a balanced approach to fiscal consolidation, while sustaining growth. The interim budget projected a further reduction to 5.1% of GDP in FY25.
As for the debt-to-GDP ratio, total government debt was steady at about 70% of GDP from FY12 to FY19, but jumped to 90% in FY21 and reduced to 81% in FY22. This, the finance minister, claimed was relatively lower than that of Japan's at 260.1%, the US' 121.3%, France's 111.8% and and the UK's 101.9%.
Similarly, a comparative analysis with other low- and middle-income countries too shows that India's external debt remains robust, while short-term debt at 18.7% stands way lower than that of China, Thailand, Turkey, Vietnam, South Africa and Bangladesh. As for the ratio of total external debt to Gross National Income (GNI), India emerges as the third least indebted country among all such economies, she reasoned. India's total external debt to its exports is 91.9%, positioning India as the fifth-least indebted nation among low and middle-income countries.
According to Sitharaman, government debt is overwhelmingly rupee-denominated, with external borrowings from bilateral and multilateral sources comprising less than 5% of total debt. So exposure to volatility in exchange rates tend to be on the lower end, she added.
The window dressing charge
Sitharaman also accused the UPA government of 'window dressing' national accounts and compromising the integrity of the fiscal numbers. FY09 deficit would have been 7.9% instead of 6.1% as officially stated, she reasoned, adding that about Rs 1.9 lakh crore was kept off the books during the five years from FY06 to FY10, mostly in the form of special bonds to oil marketing companies, fertilizer companies, and Food Corporation of India. "Including these off-budget borrowings would have severely increased the fiscal and revenue deficit numbers," she said.
In fact, the NDA government too indulged in such off-budget borrowings, raising as much as Rs 1.62 lakh crore in FY19, Rs 1.48 lakh crore in FY20 and Rs 1.21 lakh crore in FY21. respectively. However, Sitharaman took a bold step and ended such borrowings once and for all in FY22.
As some concede, the government's aggregate fiscal management has been sound, our debt-to-GDP ratio under control, besides an exemplary external account management. However, fiscal and economic outcomes are not, as economist Rathin Roy observed.
"Revenue GDP numbers have stagnated, disinvestments failed, expenditure-GDP ratio has shrunk, interest on debt, subsidies are rising, defence spending did not increase, government capital expenditure on budget has gone up, but rise in overall central government capex (budget plus public sector) is modest...subsidies like PLI (Production Linked Incentive schemes) and free ration to 800 million appears to have become permanent freebies with no strategy to reduce the fiscal drag," he concluded.
