Know how Modi government is juggling the Indian economy

Are the government finances in a bad shape? There are enough reasons to worry about that. While Prime Minister Narendra Modi and Finance Minister Arun Jaitley would love to portray that all is hunky dory with the government’s finances and that the fiscal deficit target for the year would be easily met, there have been enough pointers since the Budget announcements in February to show that the government’s finances are perhaps not in a great shape. Despite the rise in direct tax assessees and some amount of direct tax collections, the indirect tax collections (GST collections) have been much lower than targeted. Also, non-tax revenues have not been as much so far as the government had targeted for.

Meanwhile, government expenses have risen sharply. International crude prices have gone beyond what the government had assumed in the budget. If that were not bad enough, the government had to cut excise duties on petrol and diesel by Rs 1.50 to keep consumers from getting very upset, and that also upset the government revenue targets. There are other expenses to be met if sentiments are to remain positive in the run up to the various state elections and the general elections in 2019. These include feel good giveaways in agriculture and for the poor in general, as well as a massive drive on infrastructure which will also create many jobs.

With his brave promise of sticking to the fiscal deficit target, that leaves Finance Minister Jaitley in a fix. The way out has been to try and garner revenues any which way it can, even if it means leaving various people unhappy. The latest indicator of this is of course the news story by The Indian Express that the government is pushing the Reserve Bank of India to give them Rs 3.6 lakh crore from the central bank – or about a third of its total reserves. The total reserves incidentally include foreign exchange as well as contingency reserves. The RBI keeps the money because it thinks that it is necessary for handling problems in the banking system as and when they arise. It transfers money it thinks is not needed to be kept as reserves to the government.

The problem that has arisen now is that the RBI thinks it needs to keep Rs 9.598 lakh crore as reserves with it – but the government thinks that the central bank needs far less. So far, all governments have preferred to allow RBI to keep the reserves it thinks it needs. Only once were the reserves of the RBI dipped into by the government – and that was during a war. There is no war today, but the government obviously thinks that it would should have the money. Apparently, it thinks the money will be better used if it is used to recapitalise the PSU banks that have run into trouble and cannot raise capital on their own from the markets.

That is not all. The other reason for the spat with the RBI is also the government’s insistence that the RBI increases liquidity for the SMEs, and allows some of the PSBs under prompt corrective action to start lending again. The RBI does not want to do so, but the government is insisting – because it cannot afford to give away anything to the SMEs directly and would like to do so through the banks it owns – but to do that, it needs the RBI to relax its norms.

But that is not the only indicator. In recent times, the government has announced many initiatives but tried to spend as little money from the budget as possible on them – instead depending on getting others to spend for it. Thus few ambitious schemes are matched by equally ambitious budgetary allocations. Instead of that, the government has banked on some creative financing modes that allow it take credit while spending little on its own.

In some cases, PSUs have been responsible for financing the initiative. In other cases, the states and some PSUs have had to bear the burden. (For example, when Finance Minister Jaitley announced a cut in petrol prices, he only cut the Central Excise by Rs 1.50. Another Rs 1 reduction was borne by PSUs while BJP ruled states also cut Rs 2.50 from their VAT, thus allowing the government to show that it was reducing crude oil prices by a good Rs 5.)

The healthcare initiative (dubbed Modicare) too is less of a direct government allocation into the health sector and instead limited to premium payments for insurance. Even here, the union bears half the amount while the rest is being put up by the states signing up for the scheme though the Union government gets to brag about it. So the amount allocated by the union government itself is reasonably small compared to the value of the announcements it is making.

Ditto for the farm sector and many of the agricultural initiatives, all of which have little by way of budgetary allocation from the centre, but are meant to be executed by other agencies which would put in the money.

Or take the matter of the recent financing requirements of the loss making Air India. The government asked National Small Savings Fund to give a loan of Rs 1000 crore to Air India, which was finding it difficult to borrow elsewhere at reasonable rates of interest. The NSSF is supposed to invest carefully and conservatively and a loan to Air India is anything but. However, as far as the union government is concerned, this allows it to reduce its own direct allocation to keeping Air India afloat.

Meanwhile, the government has been dipping into other kitties as well for its many purposes – thus the PSUs have given the government big dividends apart from using their cash to fulfil the government’s many requirements. Thus ONGC had to buy out the government stake in HPCL because the government needed to meet its disinvestment targets – but did not want to part with HPCL. Ditto for LIC which has been a favourite pot for the government to dip in from time to time for everything from buying IDBI Bank to putting money to bail out IL&FS and rescue sundry other PSUs when their IPOs fail.
At the end of it all, Finance Minister Arun Jaitley may well manage to keep his promise of meeting the fiscal deficit target without cutting down on the spends required in an election year. Or he may miss the target by just a little. However, the costs borne by the various PSUs and by the RBI would be something that will also start showing up soon.