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On borrowed time

Author: Subhomoy Bhattacharjee
Publication: The Indian Express
Date: June 28, 2012
URL: http://www.indianexpress.com/news/on-borrowed-time/967447/0

As PM takes over finance, India is crippled by uncovered liabilities

Rating agencies are not particularly adept at navigating the depths of the Indian government’s accounts. Otherwise they should have been curious why, in just four years, New Delhi’s uncovered liabilities have more than doubled to Rs 29,06,065 crore. The sum is 20 per cent of the Indian GDP but none of the three agencies has included this piece of data in its outlook for the Indian economy as negative or stable.

It is probably good for Prime Minister Manmohan Singh that they left this track uncovered. As he gets down to his additional responsibility as the 29th finance minister of India, he can explain at peace to his party that the number is more dangerous than all the negatives hurled by the agencies and possibly earn breathing space to sail the economy out of stagflation waters.

In four years, the Indian government has so expanded its liabilities to the rest of the world, without collateral, that they now account for a fifth of the Indian GDP (at the beginning of this fiscal). In effect, the excess liabilities can only be squared off by payments in cash. If you want to know why inflation is proving so stubborn and why the RBI governor is telling anyone who will listen that interest rate cuts will not help much, the answer is here.

The sum is enough to make the prime minister want to flash it in front of any minister or party member who thinks the government should function as a printing press for currency notes. It should urge them to move ahead on sound economic policymaking, something that has gone out of the large windows that North Block sports.

Why are these uncovered or excess liabilities dangerous? A good measure of the usefulness of the work done by a government is to match its expenditure against the work for which it is used. Capital outlay is good work as it is an investment for the future. So are loans to state or local governments as they promise to pay them back at agreed rates of interest. Even West Bengal is paying back loans, which must rile Mamata Banerjee.

Measured by these standards, the Central government budget papers show that at the end of 2007-08, New Delhi’s excess liabilities amounted to Rs 12,67,580 crore, that is, those not covered by its total capital outlay and loans. By the beginning of 2012-13 we have reached a massive Rs 29,06,065 crore (receipts budget 2012-13).

In three of those years, the person in charge of the finance ministry was Pranab Mukherjee. Worse, in all those years, Manmohan Singh was, and even now is, prime minister. He must have seen it grow so staggeringly yet, as far as we know, made no comment about it.

How did these liabilities grow so big? The way yours or mine would if we promise all who matter to us that we will take care of their needs, never mind the costs. Behind the growth of liabilities are the long list of subsidies, the cornucopia of social sector entitlements, the tax set-offs for industries and, of course, the huge cost of running a leaking-like-a-sieve banking sector, all because of a promise made decades ago. All these have forced the government to borrow from every possible source.

So when the rating agencies pore over the market borrowing figures, they miss the wood for the trees. The number to look for is this: the net excess of liabilities over capital outlay and loans advanced. It captures the cost of brinkmanship with the economy, seen over the last four years.

It also makes clear what Manmohan Singh can or cannot do in this stint at the finance ministry. It should be used by him to drive home the point that the space to offer freebies and go slow on real reforms is not available to this government any more. The liabilities do not offer such scope. If it is to show the world that it has recovered the will to do business, the government must move ahead with the legislative agenda.

This not only includes the financial sector agenda, but also broader economic ones like the Land Acquisiton, Relief and Rehabilitation Bill, the Mines and Minerals (Development and Regulation) Bill, the Companies Bill and changes to the foreign direct investment rules. All of these are difficult to pursue but a spell of economic management that has created such a massive overhang of liabilities does not offer any alternative.

Singh has to move simultaneaously on another front. He has to cut the level of expenditure from even guaranteed programmes, and possibly from bailout funds like those offered to Air India. This would be difficult to do. But the government must stop the habit of sequestering the needs of any scheme into a fund. Since flows into and out of these funds are difficult, each becomes a barrier in the effort to bring the fiscal deficit down from the current high level. The NREGA, for instance, does not need Rs 40,000 crore every year; it could do with a realistic assessment of its needs.

The camel in the tent will be the proposed food security act. One believes Manmohan Singh will be really hard pressed for time in the coming months. His advisors could do the nation a favour and forget to remind him about it for quite some time.
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