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Post-Budget Overview


The budget 2009-10 that the finance minister has commended to the parliament gives a good opportunity to analyse and understand the state of economy of the country. This opportunity comes every year. This year the exercise has assumed added significance owing to the recession in the world economy and its consequent bad impact on India.
Budget projections submitted in the parliament on the eve of budget presentation comprise projections of income and expenditure of both revenue and capital natures for the current year and the future year. So one can understand the deficits in both the years and study the state of affairs at the close of the two years.
The data submitted to the members of parliament in the voluminous budget paper – that are seldom studied by a majority of the honourable and august members – include a description of debt-servicing of the country. We have analysed the same and depicted the figures in the table as under:
(Rupees rounded off to nearest crore)
RE 2008-09
BE 2009-10
Interest payment
Internal and external debt disbursement
Internal and external debt receipts
Debt servicing as a percentage of Debt receipts
Total revenue receipt
Total capital receipt other than debt
Total non-debt receipt as a percentage of debt servicing
These figures have been taken from the Consolidated Fund of India account. These are different from the official computations done in the budget document. The official computation is done only to show the percentage of interest payments to revenue receipts. Further the debt servicing liability is computed after excluding 91 days, 182 days and 14 days Treasury bills, Reserve funds, deposits not bearing interest, etc.
If we go by the official computations we are informed that 34.3% of the revenue receipts in the year 2008-09 will be consumed by payment of interest and 37.5% of the revenue will be needed only for interest payment in the year 2009-10. So interest accounts for nearly one-third of revenue earnings.
The computation in the table above highlights that non-debt revenues are grossly insufficient to discharge the liabilities on account of debt servicing as the former is only 30% of the latter in the year 2008-09 and 36.5% in the year 2009-10. Debt servicing comprises the liability for payment of interest accruing in a year and the instalments of internal and external debts that have to be paid during the year.
The table above further highlights the ratio of the debt servicing to the total amount of new loans from internal and external sources. The purpose of this calculation is to understand utilisation of fresh loans during a year. It is shocking to note that the percentage in the years 2008-09 and 2009-10 are 99% and 98% respectively. Almost all the quantum of new loans is obtained to pay off old liabilities of instalments of loan and interest thereon.
The state of economy that emanates from this analysis is precarious. Almost all new loans are arranged to pay off existing liabilities of interest and loans because the sum of non-debt revenues is only about one third of the sum required for the debt servicing. As we do not earn enough to pay off old liabilities so we are left with the questionable option of increasing the burden of loan clear old dues. The size of fund available for managing our affairs including incremental and growth needs of the economy is only about one third of our burden on account of debt. The situation is worsening over the years.
However, there is a basic strength in the Indian economy. It is that its share of external debt as compared to internal debt is almost negligible. In this regard one may say that Indian economy is better than the American economy and many of the so-called developed economies, at least on this count, as these developed economies are heavily burdened with external debts.
One student in a class in economics in a premier institution raised this aspect of debt servicing and his teacher, an authority on the subject, asked him not to bother and raise this unnecessary question because such things are happening everywhere, all over the world. The situation in the so-called developed economies is more precarious. Is it any solace? The solution is not in shutting eyes. For a capitalist economy that justifies interest on capital, carries speculative transactions on a large scale and plans its growth on deficit financing as a matter of principle, such increasing reliance on internal and external debts is a fate-accompli. What is the option, then? The socialist economy is also fraught with the same ailments. It also justifies the existence, rationale and legality of interest on capital or debt. The difference between right leaning and left leaning economists and countries are now mere name sake. Otherwise all of them believe the same set of economic principles. The difference lies only in degree of reliance on the methodologies. The real issue of structural correction in both principles and practices of economics needs to be emphasised.
The left leaning political parties are rightly taking credits for erecting speed-breakers in the path of liberalisation that the government of India was bent to tread. As a result the impact of global financial crisis in relatively less in India as compared to other economies of the world. It was expected that the ruling establishment will become cautious and avoid all risky options adopted in the name of liberalisation. But it appears that we have not become wiser in the process. The commitment towards globalisation and liberalisation appear to be die-hard. The case of permitting futures trading in currency is a pointer towards this folly. Forward trading was deregulated on the first day of the financial year 2003 when futures trading in 54 additional items were permitted. That was in Vajpayee era. But that move towards speculative economy has been provided an impetus by the Manmohan establishment by opening up futures trading in currencies.
The speculation-induced growth in economy leads to a situation where the size of financial transaction of speculative nature is many times more than that in the real economic sector. Its natural corollary is that resources are not available in the real sector of economy. Such dearth of resources for real growth of the country is strongly felt on budget eve when scarcity of resources makes choices difficult for a finance minister.
It is a vicious circle. Deficit financing leads to reliance on debts. Debt induced economic growth leads to high volatility in market. Inequality increases, needs are not fulfilled. A class of persons with surplus liquidity crops up that is engaged in increasing its liquidity and asset by merely providing debts and without any risk sharing, thereby appropriating the earnings and possessions of other real ‘earners’ in the society. This is bound to corrupt the society. Sharing assured returns and predetermined fruit of other person’s labour without sharing any meaningful risk are the core idea of interest.

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