Pranab Mukherjee,after 25 years,yet again announced our Interim Union Budget this morning….It was a fairly drab speech and clearly as general elections are fast approaching he lacked the mandate to announce big ticket reforms…..Nevertheless I was searching for some economic stimulus or some forward thinking on challenging issues…I was dissappointed….Our Political and Bureaucratic leaders simply lack that quality of leadership and vision to take us forward
Below is the Union Budget at a Glance…as was the fear,the revised estimates for the Fiscal Deficit in the Current ongoing year FY 09 has simply flown out of the Window…At Rs 326515 crs (US $ 67 Billion) It’s 6% of the GDP,against an earlier estimate of a controlled Rs 133287 crs (US $ 27 Billion) or 2.5% of GDP…that’s around 145% over earlier estimates…this is because of Oil surging to a high US $ 147/barrel in August 2008 from levels of below US $ 70 earlier in 2008…India Imports over 100 Million Tonnes of Crude Oil every year and the depreciating Rupee (20% in 2008) compounded the problem
But what really worries me is that the Estimates given for FY 10 show that despite Oil dropping to lows of US $ 40/barrel now,in absolute terms the Fiscal Deficit is shown as Rs 332835 crs (US % 68 Billion) and still high at 5.5% of the estimated GDP
This Fiscal Deficit is a Hungry Pig,eating away our resources…no amount of Lipstick is going to make a Pig attractive !…and though we say,sweat like a Pig,Pigs don’t actually sweat !…but we do ! when we look at this Pig of a Rising Fiscal Deficit !
This led me to questioning why ? was it because of escalating Non Plan Expenditure ?…Yes…but which Component ?…Defence,Interest Payments or Other Revenue Expenditure of Subsidies (Fertiliser,Fuel and Food)…..Interesting Revelations followed that throw up a few questions
Despite Borrowings shooting up by nearly 145 % from earlier estimates of Rs 133287 crs in FY 09 to Rs 326512 crs,why has Interest Payments shot up merely by less than 1 % to Rs 192694 crs from Rs 190807 crs ?
Borrowings as a % of Total Receipts has shot up to 36.24% against earlier estimates of just 17.75% in FY 09…Even in Estimates for FY 10 the Percentage stays a High of 34.92% …What are the Implications ?
If Interest Payments have not gone up then what component of Non Plan Expenditure has gone up ?…as Non Plan Expenditure shows a surge of 21.77 % in FY 09 Estimates from earlier Rs 507498 crs to the revised Rs 617996 crs
We know Borrowings have surged but specifically how has this increase of 145% in Fiscal Deficit revised estimate for FY 09 been financed ?
The brutal fact is that India has played into the hands of Oil Speculators in 2008…Oil Companies are carrying huge Inventory losses as they had booked Oil at high prices over US $ 100 for long term contracts….The Government and the Corporate Sector simply did not read the Oil Price Rice Bubble Scenario…India is paying a heavy price for this…It’s Rupee has weakened 20% against the US $ in 2008 as a direct consequence…Ironic really as the US $ itself is facing challenging times with USA grappling it’s worse financial and recession crisis in a hundred years
So how has this Fiscal Deficit Increase been financed ?…well we can see that Borrowings have surged…when I dived into the Borrowings I found that the Components of Market Loans and Short term Borrowings has surged from earlier estimates of FY 09 of Rs 100571 crs and Rs 12429 crs respectively to revised estimates of Rs 261972 crs (up 160% !) and Rs 57500 crs (Up 363% !) respectively
Then why has Interest payments not gone up ???…Anybody???and if they have not then what has ! in Non Plan Expenditure…we compute that Other Revenue Expenditure,read as Subsidies and Defence has shot up by 43% in FY 09 from earlier estimates of Rs 257545 crs to revised estimates of Rs 369096 crs…a day or two ago I blogged on the huge and specific increase in fertiliser subsidies
In fact revised Defence Revenue Expenditure Estimates for FY 09 are Rs 73600 crs ,up from Rs 57593 crs…they move higher to Rs 86879 crs for FY 10
Revised Estimates for Subsidies for FY 09 are now Rs 129243 crs,up from Rs 71431 crs….they move lower to Rs 100932 crs for FY 10
Special Securities ,in lieu of Subsidies,of Rs 75942 crs and Rs 20000 crs have been issued to Oil Marketing Companies and Fertiliser Companies respectively in FY 09
Revised Estimates for pension,police and social services expenditure too have shot up significantly for FY 09
The worry is that these Non Plan Revenue Expenditures,other than Interest, continue to be estimated as High as Rs 374225 crs in FY 10,despite Oil dropping to below US $ 40/barrel…This could possibly mean that we are carrying high inventory costs into FY 10…truly became suckers in the 2008 Oil Price Rise Bubble…Our Market Loan Borrowings too are estimated to increase to Rs 308647 crs in FY 10
This is the worrying factor…Higher Expenditure….Lower Revenues….and the deficit funding through increased Borrowings….Clearly the next government after the forthcoming general elections has it’s hands full….they will have to find some way of replacing deficit funding through Borrowings with Equity….Clearly building up a strong case for further Privatisation,Pension and Insurance reforms and IPOs of PSUs
One more Pointer…to stimulate the economy,you would want to stimulate consumption too…..interest rates will be eased…so expect rate cuts in CRR and SLR too
If you observe the lower %s of Primary Deficit as a % of GDP,you can gauge the impact of Interest Payments on the Fiscal Deficit…all the more reason to control and reduce Borrowings…but as I have stated before we have a peculiar situation that when borrowings have surged through market loans and short term borrowings the interest payments as part of non plan expenditure have not
The Writing is on the Wall….2009 and even ,I daresay,2010 are going to be very challenging years for the Indian Economy….Coalition Era Politics will continue to make decision making all that more tough and not unanimous, at the Centre,regardless of who will form the government after general elections two months down the line
Equity Markets will continue to be range bound,and despite short rallies,will maintain a downward bias