Is the Govt. bankrupt?

By Subramanian Swamy

THE WHISPERED question that is being asked in the corridors of power today is whether the Central Government is going bankrupt. The short answer to this question is that the economic indicators suggest that the Government is well on its way to becoming so. When Mr. Yashwant Sinha was Finance Minister in the Chandra Shekhar Government in 1991, the same economic indications drove him in panic to mortgage India's gold reserves, without the knowledge of the Cabinet. This time, however, he cannot do that since the RSS has posted two commissars in the Ministry who are vetting all his files. Hindutva won't permit selling of gold, nor let him do much else. So Mr. Sinha has done the next best thing: drawing inspiration from the ostrich, he took off for Davos, Switzerland.

Is this, the imminent bankruptcy scenario, an exaggeration? Not so, if we allow facts to speak for themselves. The first fact is the reality about the estimates in the 1999-2000 Budget, as the financial year nears its end. The Budget cleared by Parliament had put total revenue receipts at Rs. 1,82,840 crores. Of this, the total direct tax mobilisation was targeted at Rs. 61,600 crores, i.e., expected to rise by 18.9 per cent over the 1998-99 Budget's revised estimate. But now according to Mr. Ravikant, Chairman of the CBDT (Business Line, 28-1-2000), at the end of the third quarter of 1999-2000, collections had been only Rs. 34,608 crores which is an annual equivalent rise of 13.6 per cent i.e., 5.3 percentage points below the target. How is Mr. Sinha going to make up this implied projected shortfall of Rs. 3,500 crores? Is he going to foist more indirect taxes? And how?

The second fact is that the 1999-2000 Budget had a provision for disinvestment of public sector undertakings (PSUs), that would fetch Rs. 10,000 crores. It is an open secret now that what will be achieved will be far, far less. Mr. Sinha when cornered on this subject at the All-India Conference of Corporate Managers in New Delhi on January 27, was at his bureaucratic best: he conceded a shortfall, but did not say by how much. What is there to hide? According to my Finance Ministry sources, disinvestment in 1999-2000 would at best be Rs. 1,000 crores (mostly from GAIL sale), implying a shortfall of Rs. 9,000 crores. That is a big hole in the Budget.

The third fact is that crude oil prices which were spiralling downwards from $24.48 per barrel in 1996 to $9.79 in 1999 (September) have turned around to fiercely shoot upwards and are now at $28 per barrel, and likely to touch $35 soon! This had made nonsense of the calculations about the oil pool deficit, which has ballooned to Rs. 15,000 crores instead of the target of Rs. 12,000 crores. The Government of India should have bought a lot of oil last year at $9.79 per barrel and stocked it, but the Cabinet was perhaps too busy buying sugar from Pakistan. A huge opportunity was thus missed, and we shall now pay for it dearly.

These three facts together mean that the Finance Minister has to marshall at least Rs. 15,500 crores more to make up for the shortfalls, or else cut the fat somewhere else in the Budget. There could be more bad news because the WTO has been compelling us to reduce tariffs which would mean that customs revenue, projected to grow by 18.1 per cent, may not reach any where near that rate. Incidentally, even the Budget estimate of 18.1 per cent increase in customs revenue was an unrealistic expectation on the part of the Finance Minister. During the 1990-98 period, customs revenue grew by an average of 10.2 per cent a year, well below the 1999-2000 targeted figure.

The Budget expenditure (1999-2000) is also down to the bone. There is no fat to trim. There are certain immutable commitments too in Mr. Sinha's Budget: interest payments - Rs. 88,000 crores; defence expenditure - Rs. 49,000 crores; food and fertilizer subsidies - Rs. 24,000 crores; grants to States - Rs. 10,000 crores; pension payments - Rs. 10,000 crores; and police - Rs. 6,000 crores. This adds up to Rs. 1,87,000 crores on which there is no question of a solvent Government defaulting on payment. But the Budget estimate for total revenue receipts is Rs. 1,82,840 crores, which due to direct tax shortfall and poor response to disinvestment will have to be scaled down by Rs. 12,500 crores, i.e., to Rs. 1,70,340 crores. Thus, the core commitments alone create an yawning gap of about Rs. 17,000 crores, even after all the taxes have been imposed. In other words, without heavy borrowing, the Government cannot, from its revenue receipts, hope to cover payments for its unavoidable commitments. But where is the scope for heavy borrowing by the Government now?

The Government has already run into a dead end on borrowings from the market and banks, because of the internal debt trap. Net internal borrowing in the Budget was targeted at Rs. 67,200 crores, but interest payments on past loans are estimated at Rs. 88,000 crores. That makes interest payments exceed new loans, which means the debt trap has already become an Indian reality. By cutting interest rates on small savings and the Provident Fund, the Government can get some scraps, but it is clearly not enough to fill yawning gaps.

Besides, the Government borrowing from the banking sector, by forcing public sector banks to buy Government securities, will backfire. Today, about 38 per cent of the public sector bank deposits are frozen to invest in Government securities (up from 22 per cent in the 1970s). This has naturally meant that funds available for credit to the private sector have been declining. In fact, the rate of growth of credit extended by banks to the private sector has declined from 19 per cent a year in the 1970s to 15 per cent a year in the 1990s. No wonder then, fiscal deficit in the 1999-2000 Budget will exceed the target of Rs. 70,955 crores by at least Rs. 25,000 crores, which is 31.5 per cent more! A gross fiscal deficit exceeding 8.5 per cent of the GDP is thus likely, which means inflation is round the corner.

If these facts are not indicative of a clear slide towards bankruptcy, we shall have to delete the word `solvency' from the dictionary. Mr. Sinha has clearly painted himself into a corner, most of it with saffron colour. The Ministries are already out with their knives. The Coal Ministry is proposing to raise coal prices by 15 per cent. This will raise cement, steel and power production costs.

The Petroleum Ministry is also on the prowl looking for the hapless middle class prey. The WTO demand that all quantitative restrictions (quotas on imports) be removed by March 2001 means an industrial crisis especially in consumer goods.

But poor Mr. Yashwant Sinha, sitting in Davos, has no clue. He never did. He told the conference of corporate managers that they can demand any tax reform so long as it does not lead to tax reduction! Which reminds us of what Henry Ford had said: ``you can buy any colour of car you want as long as it is black''. For the RSS, and the Swadeshi Manch loonies, Mr. Sinha is beginning to look more and more like Mrs. Sushma Swaraj. ``More chickens coming home to roost'' (The American equivalent of the Law of Karma). But the people should brace themselves for a heavy dose of taxes in Budget 2000-01.

(The writer is a former Union Commerce Minister).

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