The Hindu Business Line : Fiscal gravy train halts

THERE IS NOTHING unusual about fiscal slippages. Thus, the news of the Centre's fiscal deficit in April-August 2004 at Rs 9,042 crore being higher than that for the corresponding previous period (as also against a budgeted increase of Rs 5,304 crore for the whole fiscal) comes as no surprise. Nor the fact that excise revenue growth in the first half of 2004-05, at 10.3 per cent, is way below the target of 18.2 per cent, or the shortfalls in corporation tax (5.8 per cent versus 40.4 per cent) and Customs (8.5 per cent against 9.9 per cent) collections. But any nonchalance would be misplaced simply because the situation on the ground has changed considerably the last few months. Till about the last fiscal, there was ample liquidity in the system to finance the government's profligacy. With no takers for their funds, banks were more than willing to invest in government paper even at sharply declining yields. Witness the Centre's outstanding internal debt soaring some 59 per cent between 1999-2000 and 2003-04 to a whopping Rs 11,34,020 crore, even as the average cost of its incremental market borrowings dipped from 11.8 per cent to 5.7 per cent.

Things are different now. There has been a pick-up in credit demand from corporates, reflective of the underlying industrial buoyancy. This fiscal, till September 24, non-food credit of scheduled commercial banks expanded by Rs 86,761 crore compared to the corresponding previous figure of Rs 33,264 crore. As a result, banks' credit-deposit ratio has swelled to 58.20 per cent from 53.6 per cent at this time last year. Banks are no longer flush with funds. On the contrary, the Centre is struggling with its borrowing programme, having so far raised just Rs 73,000 crore from the market this fiscal against last year's Rs 94,000 crore. And even this has come at a higher cost. The cut-off yield in its latest auction of an 11-year paper on Monday was 6.99 per cent, whereas in early May the Centre managed to float a 24-year loan at 5.79 per cent. The situation is no less discomforting for States and quasi-government undertakings.

The signals are clear: The days of the Centre running ever-widening deficits, in the belief that the market would absorb any number of bond issuances, are over. The fiscal gravy train has come to a halt. There is now danger of the competition for bank funds from the government and corporates driving up interest rates and derailing the perceptible investment recovery underway. The only way to avoid a disaster, economic and political, is fiscal prudence and, most important, a strong message of commitment from the Centre on this. Any plans of launching new schemes should be shelved till a complete picture emerges of their costs and fiscal sustainability. There is scope for merging, rationalising or even scrapping several welfare schemes that have shown no demonstrable positive impact. Tough decisions need also to be taken on the open-ended subsidy regime in foodgrains and fertilisers. On the revenue front, the strategy of widening the tax base and phasing out exemptions within an overall moderate rate structure should be persisted with.

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