The Revenue deficit problem

Mythili Bhusnurmath, writing in The Economic Times, 1 Mar 2010,has come up with what looks to me to be one of the most incisive pieces of analysis on the Union Budget, 2010. While Finance Minister Mr Pranab Mukherjee has given the impression that the fiscal deficit is under control, what has been overlooked by most analysts is that the more dangerous revenue deficit is still far too high.

Revenue deficit as the name suggests is the gap between revenue receipts and revenue expenditure. By definition, revenue items do not lead to the creation of long term income generating assets.

As a proportion of the fiscal deficit, the revenue deficit has increased from just 41% in 2007-08 to 79% in the revised estimates for 2009-10 , and is expected to go down only marginally to 73% in 2010-11. So during the current year, out of every Rs 100 borrowed by the government, Rs 73 will be spent on consumption. Assuming an average interest rate of 8% on government borrowing , ie an interest outlay of Rs 8 ( on the borrowed amount of Rs 100), the government must earn a return of 8/27 or almost 30% on the remaining amount to be able to just meet its interest costs.

This kind of return would be a dream for even the most efficient private sector company. So, it is quite absurd to think that the government will be able to generate this kind of return. In short, the government will fall into a debt trap having no option but to borrow more and more simply to repay its loans.

As Ms Bhusnurmath has put it aptly, “ When a private party does this, we call it a Ponzi scheme and are quick to condemn it. But when the government does it, we fail to sit up and take notice.”