India's Financial Crisis and Mounting Public Debt—Need to Restore Fiscal Balance
| Author | B. P. Mathur |
| DOI | 10.1177/0019556120140401 |
| Published date | 01 October 2014 |
| Date | 01 October 2014 |
.INDIA'S FINANCIAL CRISIS AND MOUNTING PUBLIC
DEBT-NEED
TO
RESTORE FISCAL BALANCE
B. P.
MATHUR
Government has been financing its burgeoning
public
expenditure
through
fiscal
deficits,
which
makes
it
vulnerable
to
economic and financial crisis.
On
an
average,
35
per
cent
of
public expenditure is met out
of
borrowed
funds, bulk
of
which is on current consumption, as only
one-third are used for income generating capital assets. This
results
in huge
debt
liability,
with
interest
payments
consuming more than one-third
of
revenue earned by the
governmeni. Government lacks the 'will'
to
raise taxes by
taking
hard
and
unpopular decisions.
Tax
revenue is
financing only about 50 per cent
of
expenditure. There is
no
serious effort
on
the part
of
government
to
restrict public
expenditure which is growing exponentially.
Government~·
expenditure on salary and allowances
of
its employees has
steeply increased as a result
of
Sixth Pay Commission
award,
which jumped from around 16 per cent
to
more than 25
per
cent
of
its revenue earnings.
There
is
also poor outcome
of
public expenditure due
to
outdated budgetary practices
followed by government. Budgets should be approved for a
three-year cycle and all umpent money should be allowed
to. be carried forward
Jo
the
next year and the rule
of
lapse
should be discarded.
To
put
the economy on the
path
of
prosperity,
Government~·
foremost agenda should be freedom
from crippling debt and restoring fiscal balance.
THE
NEW
BJP
led
NDA
government,
which
has
come
to
power, is
confronted with a formidable challenge
of
an
empty
treasury
and its
maneuverability
to
launch new development schemes and put
the
economy
on high growth path is severely limited, unless it embarks on a bold path
of
fiscal
rectitude.
The
huge
expenditure
incurred
by
the
last
UPA
II
government, has left mountains
of
debt, with heavy interest I iabil
ity.
Massive
public expenditure, financed
by
debt is a problem worldwide. In
the
wake
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INDIAN
JOURNAL
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4,
OCTOBER-DECEMBER 2014
of
recession
of
2007-2008, USA and West European countries injected
huge money into the economy but they continue to face serious problems
of
slow growth and unemployment. European countries have now learnt to
their dismay, that a policy
of
high public spending through budgetary deficit
is
counter-productive and will not help revive the economy. This has led to
complete reversal
of
the earlier policy and most countries are going for
severe austerity measures by cutting public expenditure. Greece, Italy, Spain
and Portugal reeling under the burden
of
heavy debt have slashed public
expenditure, but
their
economies continue to stagnate with massive
unemployment and loss
of
job and threaten their economic, as well as political
stability. A perceptive commentator Jacques Attali observed
in
Newsweek, 1
"never outside periods
of
total war, has the debt
of
the world's most powerful
states grown so immense. Never has it so heavily threatened their political
systems and standards
of
living. Public debt cannot keep growing without
unleashing terrible catastrophe". While India
is
facing huge problem
of
debt explosion, threatening the stability
of
the economy, our policy-makers
refuse to recognise the gravity
of
the problem and remain
in
denial mood.
If
we
don't
recognise the problem, how are we going to find a solution?
The UPA government
just
before the election
of
May 2009, went on a
spending spree, throwing fiscal rectitude to the wind. Upto 2007-08,
government was following prudent norms and borrowing constituted only
18
per cent
of
total expenditure, with over 90 per cent
of
it being spent on
capital expenditure. However,
in
Revised Estimates (RE) of2008-09, the
expenditure outlay was raised by over 20 per cent
of
approved budget, all
of
which was met
out
of
borrowing, which jumped 2.5 times. Thus 38 per
cent
of
overall expenditure was financed by borrowing,
of
which only 27
per cent was spent on capital works. During the five year tenure
of
UPA
government the same trend has continued as
is
evident from Table I.
Thus on an average 35 per cent
of
pub I
ic
expenditure
is
met out
of
borrowed
funds-out
of
every rupee government spends 35 paisa which
is
financed by loan. Further, out
of
money borrowed, only 33 per
cent-one-
third
is
spent on capital expenditure, rest
is
used for current consumption.
It
is
first principle
of
public finance, that borrowed funds should be used for
capital expenditure, so that income generating assets are created which
can pay back the loan.
In
the absence
of
this approach, a huge debt liability
confronts government every year.
Interest payments consume more than one-third revenue earning
of
the government. This drastically limits the money available for meeting
1
Jacques
Attali,
"The
West
and
the
Tyranny
of
Public
Debt",
Newsweek,
Special
Edition
2011-The
Key
to
Power,
p
56.
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