In RBI’s latest monthly bulletin, government’s social sector expenditure, especially in health and education sectors, has been pointed out as being ‘woefully below peers.’ The schemes and measures introduced in budget 2018-19 add up to 4.6% growth in total spending on health and education. However, regarding the percentage of GDP, we are lagging far behind most countries and even below nations which are at a similar level of development.
While RBI remains mostly optimistic about the long-term growth potential keeping in mind the bounce back from effects of demonetisation and GST, the above was just one of several macro-economic issues raised by it. This becomes more relevant as 2018 being a pre-election year saw populist policies in the budget which are not necessarily fiscally prudent. Adding the fact that the 2018 budget which affects 130 crore Indians was passed in merely 30 minutes without any discussion, RBI bulletin concerns become even more meaningful.
In simple terms, fiscal slippage refers to missing the fiscal targets set by the government. In Finance Minister Jaitley’s maiden budget in 2014, the fiscal deficit target of 3% was proposed to be achieved by 2016-17. Every subsequent budget saw this target being deferred. Currently, India’s fiscal deficit targets for 2019 stand at 3.3% and the 3% target has been deferred to 2020-2021. Estimates reveal that even this target will be missed and the deficit will be 3.5% of GDP in FY 2019.
Even after years of deferred and missed targets, Jaitley recently referred to the fiscal slippage as being merely “statistical in character.” RBI bulletin notes that budgetary slippage has a direct impact on inflation and increases the cost of borrowing overall which may further increase inflation (page 21 of pdf). India’s fiscal credibility is an important issue as it affects our credit rating and we are already at a relatively higher debt and higher deficit level even among Asian countries.
Benefits of low fuel prices not passed on to consumers
Since 2014, most of the government’s claims of reducing spending can be correlated to the low price of crude oil due to oversupply in global markets. RBI notes that the benefits of these low fuel prices did not fully reach Indian consumers. In 2013, the average price per barrel of crude oil was $105.87 and correspondingly price of petrol reached a high of Rs 74.10/litre in Delhi in September of that year. The average global oil prices since 2014 remained below $ 53. Only recently have the prices crossed the $ 60 mark as Russia and OPEC have rebalanced the supply issues. However, the petrol prices in India have remained on the higher side for past four years. To put in perspective, crude oil price per barrel on April 12, 2018 was $ 67.11, and petrol price in Delhi was Rs 73.98/litre.
The global oil prices are set to rise further and will negatively impact our current account deficit (CAD), and fuel and fertiliser subsidies. This will cause more inflation and restrict government’s capacity to invest, making India more vulnerable to market fluctuations and vagaries of monsoon. To meet targets, the government will have to raise excise duties and taxes/cess without even having the escape route of blaming the previous government as it nears completion of its full term.
The Logical Indian take
A cold hard look at facts and numbers instead of platitudes and assurances is necessitated by the fact that the parliament is barely functioning and pre-election populist measures can hamper the fiscal discipline to a severe extent. The RBI bulletin mentions the increasing trade deficit as our export growth is unable to match the increase in imports. We may be over-dependent on meeting disinvestment targets and a good monsoon if Indian economy has to stay on course.
The government remains unable to solve the problems of underemployment and disguised employment. Countries and even Indian states which are doing relatively well today are doing so because they had invested heavily in building the human capital, particularly health and education sectors. Short-term political measures might get one vote, but with poor education and poor healthcare facilities, it is hard to see India reaching its potential.