Originally, the target was to bring down Indian fiscal deficit to 3.6 per cent of the GDP in 2015-16; but it has been postponed by a year. Now, government is targeting 3.9 per cent in the current fiscal. Thus, we have a lag of 1 year (no external growth in this whole year).Ahead of the Budget, RBI governor Raghuram Rajan, warned against generating rural growth through additional debt saying that any deviation from the fiscal consolidation path will hurt stability of the economy.
Let me explain how this works:
1. Country has economic experts (govt. advisers), who calculate and formulate a "Path of Success" which is called "Fiscal plan". There are 3 types of such plan viz. Recovery, Consolidation and Aggressive Development.
2. As per the above plan, the Finance Ministry and RBI formulate government programs.
3. These govt. programs are announced in the Finance Budget every year with relevant facts and figures.
4. The Economists recheck their calculations and make proper adjustments so as to stay on the "Path of Success" and not deviate.
This year, every thing was smooth until the government announced a few aggressive developent plans. Finance Ministry aims at Higher Development and prosperity of people (like a younger brother), but this comes at a cost which is suffered by the Economy (family). Thus RBI (the elder brother) keeps a check on its functioning, which results in Sibling quarrels.
Now lets get back to the main story:
Now what is an Aggressive Development Plan?
1. Government has a fixed income by way of Taxes and other revenues, which is to be utilised for managing the govt. programs.
2. But, even if the Govt. don't have as much of revenue, it can take International Loans and finance these projects.
3. Now they need to be calculate that the Finance cost (interest) suffered by the Govt. is getting set off by the growth / income achieved by the country.
4. Generally, the Govt. programs are long term i.e. they take loan today but the returns are enjoyed after 3-5 years.
5. These projects which have too long payback period and huge current investment (that too Foreign loans) result in negative returns (due to time period, inflation, corruption, regulatory costs, policy flaws etc.), such a plan is known as Aggressive Development plan. Thus, this result in Fiscal deficit and not economic growth on paper.
There has to be a balance between Fiscal Deficit and Economic Growth, since Development does not directly result in Growth of economy, thus fiscal deficit driven Development is harmful for an Economy.
Recently the Indian Government took huge foreign loans to develop infrastructure (Metro rails, bullet trains, rural broadband, rural electrification (UDAY), and many more projects) this results in higher interest cost and no direct income flow in near future.
We can expect Metro and Bullet trains to generate some money (that too after a long period of time) but projects like UDAY are zero income generation projects.
Yes, the rural areas will be developed, better facilities, better infrastructure, but at a cost, which can not be recovered (plus, this plan was not a part of previous Finance Budget).
Thus, Economists (and RBI) are saying that, the returns enjoyed due to rural development is too costly for India specially when the world is experiencing a huge economic meltdown. Thus, as per the calculations, India has deviated from the well planned path and thus, Indian Fiscal Deficit (i.e. total Expenses incurred exceeds the total Income of the Government in 2015-16) which was supposed to be 3.6% of GDP, will be 3.9% of GDP and we will reach 3.6% by end of next year further 7th pay commission is to be introduced this year which is supposed to add further 0.65% of the GDP to the deficit. Thus, it is worth asking for loans only if there really are very high return on investments that we are foregoing by staying on the consolidation path, which is not the case here.
But, the Central Govt. looks at it with a different point of view:
1. If we always think that there is no economic benefit in rural development, then there wont be any rural development ever.
2. Indian economy is not in the recovery phase, but in consolidation phase, so we can afford the risk.
3. If government invests money, they grow by 7 % (GDP growth rate) but Indian Corporate grows at an average of around 25%
4. Thus, rather than Govt. keeping the money with itself, provide the Corporate Indian with such an infrastructure, that they can spread, and grow at even better rate.
5. Yes, we accept that we are late by a year, but the growth achieved after the development will be exponential (as compared to current rate).
6. This is the best time to take this risk as, world is experiencing economic meltdown, they don't have any other investment opportunity, thus, we get these loans at a cheaper rate.
I would like to conclude by pointing out that India is doing quite well, so it wont be a country which would face any Financial Apocalypse, thanks to its diversity and international relations, so these risks look planned. Further, inflation is already under check, so why worry about fiscal deficit?
But, you should not judge a student by his class tests, wait for the finale...
