THE new Government is soon to put its money where its mouth is: July 22, Budget day, is eagerly awaited, by Indian decision-makers and other, more recent 'stakehol-ders' in the economy, namely multilaterals and foreign investors. India's disempowered, too, expect a better deal, however uninteresting this may be to the English language press.
All these expectations, but one, huge, constraint. The new Government has inherited a poisoned chalice. For all the claims made by Manmohan Singh, the public finances are insolvent. So is the trade account. We are indebted, at home and abroad, and have managed our domestic and international finances unwisely.
Hyperbole? Was not India on the fast track to becoming an Asian tiger, poised to leap into a high growth era? Let's look at the evidence. First the infamous budget deficit problem. This, allegedly, was Dr Singh's great success. Not so, unfortunately. Dr Singh had an uncanny ability to play down reality and broadcast projections as truth. This is now evident when we look at the record.
Deficits can be measured in many ways. The most used measure is that of the fiscal deficit. Dr Singh claims this has fallen in his time, and P. Chidambaram wishes to reduce it further. Great! But does this tell us anything about fiscal solvency? Governments borrow to finance their investment expenditures, hoping that the returns from investments will pay off debt incurred for that purpose. Yet, governments, like firms and households, must be able to control their consumption spending. If you consume more than you earn, you will eventually go bankrupt. In public finance, an indicator of this is the revenue deficit which measures the difference between the Government's current expenditures and revenue (known as the revenue account). For the last 16-odd years, we have had a revenue deficit....