Fiscal Deficit - a major deterrent to our progress
It was perhaps a foregone conclusion that India's subsidy bill would spiral up and comfortably exceed the Government's target like it has done consistently in the past. But by how much was any body's guess?
Now with the food subsidy bill likely to become a reality, the magnitude by which the actual subsidy will beat the target could be as much as 1 lakh crore. As the below chart shows, it is the biggest such gap in recent memory and could also push the fiscal deficit in the vicinity of 6%. With such gaping holes in the finances of the country, can inflation be kept under control ? I doubt very much !!!!
Reserve Bank of India and Government of India are working in opposite directions. Good works of RBI are repeatedly nullified by irresponsible policies of the Government.
If the price of a raw material commodity is rising, the company using this tries to pass on the costs to its customers and restore profitability. So what does India's management, meaning the Government of India, do on this front? Well, it gives subsidies to its customers and is hardly able to pass on the costs.
Can you imagine the balance sheet of a company that has to pay high import bills and then has to sell the commodity at a discount? The balance sheet will be highly leveraged. For India, it means a high fiscal deficit.
So should petroleum product prices be deregulated? Yes, deregulating oil prices would certainly help reducing our dependence on imports. While the consumers would become more efficient users of fuel, price deregulation would also attract a lot of investment in the sector.
But at the same time the taxation structure on petroleum products needs to be relaxed. Despite the oil subsidy, we end up paying high fuel prices due to excessive taxation.Will the Government of India stop engaging in practices that tend to severely cripple its balance sheet and in turn affect future growth prospects?
The answer seems to be in the negative. Why? There is no accountability. The management of India changes every 5 years. So every contesting political party is simply focused on garnering votes and winning the next election.The best way to appease the masses is by taking up populist measures such as doling out high subsidies and incurring revenue expenditure.
But this kind of expenditure goes down the drain and does not generate wealth in the future. For long term wealth, we need a government that focuses on capital investments in R&D (Research & Development) and technology.
But thinking long term would require some tough reforms at the risk of losing the electorate.
So as long as we have a skewed incentive structure for the government, oil will remain a major economic problem on which we have no control, which will certainly put the future prospects of the Indian economy at risk.