Dinner @ Rs 7,721, last supper on the edge of the precipice

History, they say, repeats itself, first as tragedy and then as farce. In India’s political economy, it is increasingly difficult to distinguish the tragedy from farce. Last Friday, the Prime Minister told the nation that money doesn’t grow on trees. This Saturday, the nation woke up to a new chapter in Manmohanomics. The country has been informed—thanks to an RTI query by Hissar-based Ramesh Verma—that the government spent Rs 28.95 lakh on the third anniversary celebrations of UPA II.

In a country where anyone earning Rs 22 per day (in rural India) is ineligible to be poor, the government spent Rs 7,721 per person on a dinner. By its own calculation that amount would have paid for a family’s annual consumption of cooking gas. The Prime Minister also said that the UPA has “been voted to office twice to protect the interests of the aam aadmi” but that didn’t stop the splurging of Rs 14 lakh on just the tent for the event. Isn’t it incumbent on a government that caps the number of cylinders per family—ostensibly to bring down subsidies and deficit —to observe a cap on what is a justifiable level of expenditure! Indeed, in keeping with the government’s inability to budget expenditure, of the 603 invited to the event, only 375 came.

The question that begs to be asked is not what the UPA II was celebrating but whether the UPA can choose to celebrate given the state of the economy. The question being asked is how did the economy reach where it has and who will be held accountable for this mess. This Friday, the Committee on Roadmap for Fiscal Consolidation submitted its report to the Ministry of Finance. The committee, led by the brilliant Vijay Kelkar, has minced no words in its assessment. More importantly, unlike most sarkari committees, it has eschewed the need for political correctness.

In its opening sentence, the report has declared that “the Indian economy is presently poised on the edge of a fiscal precipice”. It observes that fiscal deficit is likely to be 6.1 per cent, that current account deficit currently at 4.2 per cent could worsen and “sovereign credit downgrade and flight of foreign capital” are likely unless corrective steps are taken. The committee has warned against the classic “do-nothing approach” and emphasised that “growth slowdown is inefficient, inequitable, and potentially politically destabilising”.

The genesis of the crisis stems from profligacy and pathetic budget management. It is true that mandarins and ministers in the past have got away with numerical calisthenics. The budget of 2012-13 presented in March though takes the cake. Fudge is probably the most charitable description for what has been presented to the nation. Budget 2012-13 underestimates expenditure, borrowings and subsidies and overestimates revenues and growth.

Pranab Mukherjee’s budget for 2012-13 estimated that the government would borrow Rs 1,500 crore every day for the full year. The trend of the first half of the year shows the government has borrowed over Rs 2,000 crore every day between April and September. Subsidies rose from Rs 1.7 lakh crore in 2010-11 to Rs 2.16 lakh crore in 2011-12—for fertilisers, the government provided Rs 49,997 crore and spent Rs 67,198 crore; for food, it provided Rs 60,572 crore and spent Rs 72,823 crore; and on fuel, it provided Rs 23,640 crore and spent Rs 68,481 crore. Yet in its wisdom, total subsidies were capped at Rs 1.9 lakh crore. Indeed, the Rs 43,000 crore provided for fuel subsidies for this year was exhausted by August and even after the hike in diesel prices, fuel subsidies are expected to touch Rs 1 lakh crore.

The budget also overestimates tax revenues despite the previous year’s performance. In 2011-12, collections of corporation tax, income tax and central excise were less than estimated. Total tax collected in 2011-12 was Rs 31,000 crore less than estimated at Rs 9 lakh crore. That didn’t stop budget-makers from estimating tax collection at Rs 10.7 lakh crore. Every year since 2008, the Reserve Bank has been forced to accommodate the government through a multiplicity of instruments. Reserve money has shot up and so has net credit to government. The inflationary character of successive budgets could not have been a secret. The tradition is that every budget—at least the broad outline—is presented before the Cabinet and every finance minister takes the okay of the prime minister on details. It is inconceivable that the underestimation of reality and overestimation of fantastic hope were not noticed. Why didn’t the economist prime minister react?

Last week, Raghuram Rajan, the new chief economic adviser, declared confidently, “I don’t think we are anywhere near the 1991 crisis.” The confidence is obviously not shared by many. Not in the absence of political will. The Kelkar Committee Report observes that the economy is headed for a “perfect storm”—simply put, is teetering on the brink of a crisis. The do-nothing approach will result in high fiscal and current account deficits. High borrowings will crowd out investment. Given the uncertainty in global marts, foreign capital flows are fragile. Foreign exchange reserves are falling and the currency is especially vulnerable. “The combination,” the committee says, “is reminiscent of the situation last seen in 1990-91.”

Unless the government wakes up to the enormity of the crisis faced by India, the Rs 7,721 per UPA-person dinner could well be the last supper.

Shankkar Aiyar is the author of  Accidental India: A History of the Nation’s Passage through Crisis and Change

shankkar.aiyar@gmail.com