A near-complete slamming of the brakes on expenditure of all kinds?defence, welfare, roads?has seen a dramatic slowing in the runaway fiscal deficit. Data released on Thursday for April to December FY13 shows the fiscal deficit as a proportion of the full year?s budget estimate was a lower 78.8% as compared to 92.3% in the same period last year. A large part of this, there is no doubt, has taken place because someone else is footing the bill?the hapless PSU oil sector is being starved of legitimate subsidy reimbursements?but there has been severe squeezing in other sectors as well. According to a Reuters story published on our front page today, the FM is planning expenditure cuts of a whopping R1.1 lakh crore or around 1% of GDP?around R10,000 crore of this is to take place in the defence ministry and R21,000 crore in the rural development one. All told, in April-December, while non-plan expenditure rose 12.2% versus the budgeted 8.7%, plan expenditure rose just 6.9% versus the budgeted 22.2%?as a result, total expenditure rose 11% versus the budgeted 13%. While critics argue such sharp cuts will lower the year?s GDP even further, financing the runaway current account deficit depends very largely on how foreign investors view India?s reform efforts, the topmost among them being controlling government expenditure.
Nor is it certain that slowing of essentially wasteful government expenditure is a bad thing. Data for FY12, also released Thursday, show overall savings have fallen to an 8-year low of 30.8% of GDP, and Nomura Economics Research projects this will fall to a decadal-low of 27% of GDP in FY13. Not surprisingly, a large part of the fall is driven by the halving of public sector savings, from 2.6% of GDP in FY11 to 1.3% in FY12. This, in turn, has been driven by a dramatic worsening of government savings from minus 0.6% of GDP in FY11 to minus 2% in FY12. Any reduction in government dissavings, as the FM is promising, can only lower the drag on overall savings. The slowing in household savings, from 23.5% of GDP in FY11 to 22.3% in FY12 was aggravated by the increased proportion of this being saved in gold primarily. Private corporate sector investments fell by around an eighth in FY12, in real terms, thanks largely to the kind of issues the Cabinet Committee on Investments is trying to address. While public sector investments remained flat in real terms, this was achieved by a hike in what the public sector drew from the rest of the economy?the public sector share of overall capital formation in the economy stood steady at 24% in FY12 as well, but its share of savings fell from 7.5% in FY11 to 4.2% in FY12. It is obviously true checking the fiscal deficit is of little use if this is financed by taking away funds from the public sector but there are two sides to this. While starving oil PSUs will hurt their investments, the large losses by PSUs such as MTNL and BSNL are equally to blame for stagnating investments by PSUs. In a nutshell, there?s little point the FM slashing expenditure in other areas if inefficient PSUs are going to squander large sums away.
