The ‘Fiscal Deficit’ Bogeyman and His Uses

Till about 1990, hardly anyone in India mentioned the ‘fiscal deficit’. The term is not even to be found in the Economic Survey 1989-90; it makes its first appearance in the Economic Survey 1990-91, under the shadow of the impending IMF structural adjustment programme. The budget deficit – i.e., printing of money by the central bank to meet Government spending needs – used to be discussed in the past, but with the introduction of IMF-led structural adjustment programme in 1991, budget deficits were prohibited: The Government now had to borrow from the market to meet its needs.

Since 1991, the term ‘fiscal deficit’ has become tiresomely familiar to the consumers of news; every news channel and newspaper presents lurid charts telling us of the disaster that awaits us if we do not bring down the ‘fiscal deficit’. Parliament even passed a law in 2003 requiring the reduction of the fiscal deficit to 3 per cent of GDP by 2008; while this reduction had to be rescheduled because of the 2008 crisis, the Government has now set about reaching the targets with renewed vigour.

However, people at large are confused about what the fiscal deficit really is, and even more so about what to think of it. The lack of clarity among the public about the nature, causes and consequences of the fiscal deficit has allowed the dominant interests in society to propagate all sorts of nonsense about it. Their real agenda is to squeeze even further the small share of the social product to which the working people have access, as well as to hand over to foreign and domestic large corporate firms valuable national assets. Let us look at what happened over the previous year, and what lies in store, in this regard.

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Will Cutting the Fiscal Deficit Bring Down Inflation?

In order to justify his savage cuts in developmental expenditure during 2012-13, Chidambaram told the Lok Sabha that he was compelled to make them; that, had he not done so, there would have been high inflation. “When it (the fiscal stimulus) impacted the fiscal deficit, inflation went up to 9.6 per cent in 2010-11 and then 8.9 per cent in 2011-12. Now it is 7.5 per cent. This is a consequence, inevitable. You run a high fiscal deficit, it will be inflationary,” he said. The Reserve Bank Governor D. Subbarao, too, recently pressed for a cut in the fiscal deficit, citing his concern for the “people who are hurt by inflation – the large majority of the poor .”

The theory Chidambaram uses to justify his actions – which theory is also propagated by the Reserve Bank of India – is that there is excess demand in the economy, leading to price rise. In other words, this is ‘demand-pull inflation’. That excess demand, Chidambaram claims, needs to be squeezed out of the economy by reducing Government spending and/or maintaining high interest rates. The Economic Survey 2012-13 confirms that recession itself is part of the inflation control package: “The government can curb demand through fiscal consolidation, while the RBI does so through high policy rates and tight liquidity. These measures may have an adverse effect on growth, but that is precisely how they curb inflation.” (p. 94)

However, the drastic reduction Chidambaram thus brought about in the fiscal deficit in 2012-13 failed to bring down high consumer inflation, which is what matters to the people. Rather, inflation in the all-India consumer price index or CPI (New Series) rose steadily from 8.8 per cent in February 2012 to 10.9 per cent in February 2013. The averages of all the consumer price indices show a rise of one percentage point or more between 2011-12 and 2012-13.[1] The latest available data show that the CPI (Agricultural Labour) is soaring, at 12.7 per cent; the CPI (Industrial Workers) is only slightly behind, at 11.6 per cent.[2] The soaring CPI indices are eating into people’s real incomes.

That this occurred despite (i) the RBI maintaining high interest rates, (ii) the fiscal deficit being reduced severely, and (iii) industrial growth plummeting to near-zero and GDP growth falling to its lowest level in a decade, shows that the theory on which the RBI and Chidambaram are justifying their actions is bogus.

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Large Corporate Firms on Investment Strike, Playing with Cash

A recent note by an equities firm reported that just 54 large firms (for which the researchers were able to obtain figures) held cash and cash equivalents (i.e., paper instruments that can easily be converted into cash) of Rs 4,30,000 crore, or Rs 4.3 trillion (one crore = 10 million). (See Table 1) That is, they were hanging on to a sum worth roughly 4.3 per cent of GDP instead of investing it in productive activity. Thus, while some individual firms or sectors may be short of funds, the corporate sector as a whole is not.

Table 1: Cash & Cash Equivalents Held by 54 Private Corporate Firms, 2nd qtr 2012-13
Sector	No. of firms	Rs. cr.
Oil and gas	5	1,20,498
Information Technology	6	47,308
Telecom	3	5,683
Cement	2	9,745
Infrastructure	2	3,896
Real Estate	1	1,395
Fast-Moving Consumer Goods	5	14,069
Pharmaceuticals	5	13,420
Metal and Mining	11	1,46,291
Capital Goods & Power	9	31,201
Automobiles	5	38,053
Total	54	4,31,560
Cited in Nirmal Bang Institutional Equities, India Strategy 2013-14, March 2013.

The Indian corporate sector has been calling for the RBI to revive growth by reducing interest rates, implying that productive investment is being held back by the cost of credit. The RBI has been advancing certain arguments for not reducing interest rates, or doing so very slowly. Leaving these wrong arguments aside for the moment, what should be noted is that the large corporate firms as a group are not short of funds. What they lack is the desire to invest, because the prospects for profits look poor with the downturn in the economy.

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U.S. Carrot and Stick with Sri Lanka

The following news item in The Hindu (March 20, 2013) indicates that, as suggested in our earlier post, the US is using both the stick and the carrot in realigning Sri Lanka in the direction of US interests. The US’s decision to replace the words “credible international investigation” with a “credible and independent investigation” by the Government of Sri Lanka itself (i.e., the guilty party itself) indicates that behind-the-scenes discussions have taken place between the US and Sri Lanka on the resolution. – R.U.P.E.

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Whose Agenda? US Strategic Interests, India, and Sri Lankan War Crimes

No political question can be entirely separated from the political economy of the country and that of the world. So too for the question of ‘human rights’: We need to look at who is raising the question, from what angle, and their position within the world order, in order to grasp the real significance of that particular development for the lives of the people.

The United States has circulated a proposed resolution against Sri Lanka at the United Nations Human Rights Council (UNHRC) in March 2013. A documentary by Britain’s Channel 4 (No War Zone – the Killing Fields of Sri Lanka) is to be screened at the UNHRC.This documentary is a follow-up to two earlier documentaries by the same channel. The first, titled Sri Lanka’s Killing Fields (June 2011), containing particularly shocking footage of war crimes, was screened at gatherings of representatives of different countries. The second, Killing Fields: War Crimes Unpunished (March 2012) systematically presented the evidence of the Sri Lankan government’s war crimes. An advance screening of the latest film was held at Delhi on February 2. In the words of the director of the film, “The new evidence in the film is certain to increase pressure on the Indian government not only to support a resolution on Sri Lanka and accountability, but also to ensure that it is robustly worded, and that it outlines an effective plan for international action to end impunity in Sri Lanka.”[1]

As we write this, it is reported that India is likely to vote in support of a US-backed resolution against Sri Lanka before the UNHRC in March 2013, as it did in 2012.

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