Governing India through fiscal math (What about the revenue deficit?)

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 Governing India through fiscal math (What about the revenue deficit?)

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• Fiscal Deficit is the holy grail : The government is managing the fiscal through one overriding number – the fiscal deficit (FD). It may not be a prudent way of running the economy.
• FRBM 2003 onwards : Since the Fiscal Responsibility and Budget Management Act was made, all parties running the central government have respected the FD figure. But the kind of respect it has gathered after 2014 is remarkable. The holy word now is “fiscal prudence”, and a target of 3% of the GDP. How did this number arrive in the first place?
• The going wisdom : Government believes that (i) fiscal prudence rewards economies, and (ii) reducing FD is the right approach always. That is not necessarily a correct thought.
• Soundness : It is good to have a “sound” fiscal policy. But size of FD is not the only way to judge soundness. A better way is – the state of the economy! 
• Fiscal and Revenue deficits : The FD shows the overall imbalance in the Budget. There is another deficit – the revenue deficit (RD). RD is the gap between current revenues and current expenses. If it exists, then the govt. is unable to save anything from its current income, and needs to borrow to just keep running! The FD figure’s movement does not indicate clearly the RD’s movement.
• If FD and RD both exist : If they both co-exist, it shows that borrowings are funding current consumption, and if that happens for many years, it is truly a bad idea. Hence a focus on FD without discussing RD is useless.
• Today’s situation : The 2019-20 numbers show a small drop in FD, and a rise in RD. So what fiscal prudence?
• History of RD : Till the 1980s, RD was non-existent, but then populist politics took over! RDs are structural now. So three learnings – (i) Public debt will keep rising, (ii) We are borrowing to consume, (iii) Future generations will repay the debt.
• What about the real economy : Joblessness has grown, and exports growth has reduced. Private investment is very low, which is strange if the FD is going down (thereby reducing the “Crowding Out” effect).
• Dollar-denominated borrowings : If the first-ever foreign currency sovereign bonds are indeed issued, it will be only shifting the financing of the RD abroad, nothing else. Of course, with additional, totally new risks!
• Summary : The fixation on fiscal deficit without considering the revenue deficit is a meaningless exercise of imprudence, and is further negatively impacting the Indian economy.

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