Whose standards are poor?

Collectively, by 2019, the farm loan waivers of all States and the estimate floating around of the total amount of  500 and 1000 rupee notes that were returned being in excess of the amount of estimated legal tender of both these denominations by about 1,00,000 crores of rupees amount to almost Rupees 4.1 lakh crores or Rupees 4.1 trillion. India’s GDP in March 2017 is now estimated at Rupees 152 trillion. So, this amounts to 2.7% of GDP as of March 2017. Of course, by the time 2019 comes around, the GDP will be high and hence, this percentage will be lower. But, it should be at least 2% of GDP.

This is what ‘Business Standard’ wrote:

As demands for farm-loan waivers grow across Punjab, Haryana, Tamil Nadu, Gujarat, Madhya Pradesh, and Karnataka–after Uttar Pradesh and Maharashtra wrote off loans worth Rs 36,359 crore and Rs 30,000 crore respectively–India faces a cumulative loan waiver of Rs 3.1 lakh crore ($49.1 billion), or 2.6% of the country’s gross domestic product (GDP) in 2016-17. [Link]

The ratio is overstated in their report. 3.1 out of 151.8 = 2.0% of GDP. Anyway, they have not taken into account many things including the possibility that Indian banks collected more notes than what RBI had reckoned was in circulation!

Nonetheless, the story in ‘Business Standard’ from ‘Indiaspend’ is worth a read. In addition, read this story in ‘Times of India’ and weep.

In recent years, India’s fiscal consolidation at the Union level has been already undone by the profligacy of States, even before taking the restructuring of the debt of their Electricity Boards into account. This is what the economists from JP Morgan wrote in a recent report:

As the RBI’s latest study on state finances (May 2017) confirms, the consolidated deficit of the states increased from 2% of GDP in 2012-13, to 2.2% in 2013-14, to 2.6% in 2014-15 and – here’s the real concern – to 2.9% in 2015-16, despite the much higher fiscal transfers from the Center, under the Fourteenth Finance Commission, from that year onwards.

These are all excluding the UDAY liabilities, which can be deemed to be one-offs. Including UDAY, the consolidated state deficit is estimated at 3.6% of GDP in 2015-16 and 3.4% of GDP in 2016-17.

But, the numbers for 2015-16 are Revised Estimates (RE) and for 2016-17 are preliminary estimates. Actual numbers could be lower or higher. For example, including liabilities on account of UDAY, RBI had earlier expected the States’ consolidated deficit in 2015-16 to be of the order of 3.3% of GDP and it is now estimated at  3.6% of GDP. Incidentally the original budget estimate for States’ combined fiscal deficit was 2.4% of GDP. Presumably, that was before taking UDAY into account. You can see one of the tables of the RBI report on State finances published on May 12, 2017 here.

These numbers do not include additional, recurring annual liabilities on account of the States implementing the Seventh Pay Commission report.

Here are some additional key points from the JP Morgan Report:

Furthermore, with most states yet to implement their Pay Commissions, and with a non-negligible fraction of state revenues coming from stamp duties – which are under pressure on account of stress in the real estate market – the challenges for state finances are only likely to grow, even without growing risks of proliferating farm-loan wavers.

The consolidated general government deficit could be of the order of 7.0% of GDP already by the end of March 2017. With all of these – farm loan waivers, Pay Commission implementation, UDAY final bill, bank recapitalisation (it has hardly begun), etc., where are we heading in terms of the consolidated fiscal deficit?

Can we now sit down and assess calmly whose standards are poor?

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