Tag: fiscal deficit

Reflections on Neelkanth Mishra’s Column on the Budget

Most of what you see written about the budget is honestly not worth reading, but there are some folks whose musings ought to be mandatory reading. And if you are going to ask me for my recommendations along these lines, Neelkanth Mishra is certainly among the top three.

What follows is a style of note-taking that I used to post a lot of a couple of years ago or so. I will share those parts of his write-up that I chose to highlight, and also explain why I highlighted them. Here goes:

  1. “As the state’s footprint on the economy has shrunk over the past three decades, the relevance of the annual Union budget for the economy has contracted accordingly.”
    ..
    This point is a fairly obvious ones to professional economists, but it bears repetition. Especially because this day is treated with such importance by the media. Panel discussions, full page articles, Twitter-aflutter – although that last one doesn’t take much, so I suppose a budget day might actually be understandable! But we’re talking about roughly a tenth or so of India’s GDP where the budget is concerned, and if you take into account the fact that GST is now a reality, the centrality of the budget is reduced even further.
    Don’t misunderstand me – it is an important event, it’s not as big a deal as it once used to be.

  2. With reference to the government’s fiscal conservatism: “This seems prudent, given the limited tolerance of financial markets globally to policy errors, and the economic damage market turbulence can cause.”
    ..
    Remember Liz Truss? Things could have been far worse, and they aren’t, and that’s worth remembering.

  3. “The Union government’s commitment to the medium-term fiscal consolidation path was reiterated: A fiscal deficit of less than 4.5 per cent of GDP in fiscal year 2026.”
    ..
    I’m not sure if I should be doing a Straussian reading here in terms of what has been left unsaid, but I’m tempted to disagree with what has been written. I’m done reading about glide paths and medium term projections of the fiscal deficit. It is enough to get a sense of where it will be next year, and the data over the last twenty years or so shows us that planning for beyond that horizon is a pointless exercise. Plus, the uncertainty in the global economy is such that any number for the year 2026 is a guess. Nothing more.

  4. “Given the strong tax buoyancy this year, the government could have taken a slightly lower tax-to-GDP ratio next year than the unchanged number it has assumed, but the benefits of greater digitisation and formalisation may continue, and lower tax rates often help tax compliance.”
    ..
    I agree with the first half of the sentence, and I hope the second half turns out to be true, but I’ll want to bet against it. I would be very glad to be wrong.

  5. “Perhaps more importantly, the government chose to redeploy its savings from the fiscal support it had to provide during Covid and then in the aftermath of the Russia-Ukraine conflict to capital expenditure”
    ..
    We need to do more of capital expenditure, there is no getting around this point. Therefore agreed.

  6. “The general government debt to GDP ratio (which includes central and state debt) has fallen from 90 per cent in FY2021 to 83 per cent now, as nominal GDP growth has picked up, but it is still well above the 73 per cent seen pre-Covid, and the 60 per cent recommended by the FRBM Review Committee. For it to fall back to those levels, the primary deficit (fiscal deficit minus the interest payments) needs to fall to nearly zero. However, it is still near 3 per cent of GDP, and even at 4.5 per cent fiscal deficit in FY2026, the primary deficit would still be nearly 1 per cent of GDP.”
    ..
    See this for a relatively simple explainer of not just the theory around deficits, but also said theory’s evolution over time. Be source agnostic – by which I mean don’t depend on any one resource in particular. But this is something you should be very familiar with if you are a student of macro.

  7. “Economies like India need to grow out of their fiscal problems and cannot shrink into them.”
    ..
    I hope you don’t understand this sentence, and I hope you think about it, and then read the next sentence from the write-up.

  8. “This is where the nature of government expenditure makes a difference. Allocations to railways and roads, as well as to schemes like Pradhan Mantri Awas Yojana and for energy transition should support growth both over the near term (via expenditure) as well as the medium-term (through cheaper logistics and greater energy self-sufficiency).”
    ..
    Yup, but always beware the limitations of state capacity.

  9. “In this regard, the demand to switch back to the old pension scheme for government employees, where taxpayer funds are used to guarantee benefits to a select group, is a risky one.”
    ..
    An understatement if ever there was one.

  10. “That state governments this year may end up with an aggregate fiscal deficit of just 2.4 per cent of GDP versus the 3.4 per cent budgeted, given the surge in tax inflows and an inability to quickly ramp up spending, is also helping. The decline in bond yields on budget day is a sign, in our view.”
    ..
    In my experience, bond market dynamics remain poorly understood among both undergrad and post-grad students of economics. That’s a broad characterization, and as with all such broad characterizations, there are significant exceptions. But I still maintain that the bond markets don’t get enough importance in the teaching of macro at an introductory level.

  11. “In turbulent times like these, a good budget is just a starting point. The turmoil in the global economy is likely to continue, as the impact of higher interest rates shows up in weaker demand for consumption and investment, and geopolitical tensions continue to disrupt energy supplies and trade. As the resilience of the domestic economy gets tested by global headwinds, deft fiscal manoeuvres may be necessary, like they were this year.”
    ..
    With this budget, we’ve left ourselves some wriggle room if things go south really badly really quickly this year – and they well might do so.


Your mileage may vary, but the meta-point of this post (and all such posts by me) is not just to show you which parts of an article I found worth highlighting. It is also to tell you that note-taking is an underrated activity. Get into the habit of taking notes for the good stuff that you read. You don’t need to make your notes public like I just did (although skin in the game remains an underrated concept). But the more you take notes, the more you’ll begin to connect the dots across different stuff you’ve read, and then you’re off to the races.

Build the habit of taking notes and trust me, it is very much a superpower.

Understanding fiscal deficits

Fiscal deficit is a phrase that is bandied about every year, but not very well understood – both in terms of how to arrive at it, but also in terms of what it means.

In the first part of today’s post, I’ll explain how to arrive at it. In the second part, I’ll rely on a couple of lines from an excellent article written by Rathin Roy a while ago.

I work at the Gokhale Institute of Politics and Economics, Pune. This means that while I continue to be employed at the Institute, a salary will be credited into my bank account every month. I can also choose to augment my income by, say, breaking a fixed deposit, or by taking a loan. The first part is my “recurring” income, while the latter is a one-time income.

I stay in a rented accommodation. This means I have to pay rent every month. I also have to buy groceries, pay for utilities, and pay the salaries of everybody who works at my household. But also, every now and then, I can, say, buy a car. Or a laptop. Or a house. These are not monthly expenses – at least not in my household they aren’t! The first set of expenses are “recurring” expenses, while the latter are one-time expenses.

Taken together, what matters in my household is that I must be able to arrange for ways to meet my monthly expenses. Let’s write down some very simple numbers:

  1. Assume that my recurring expenses are one lakh rupees – one hundred thousand INR. (Groceries, rent, salaries, petrol, eating out etc etc)
  2. Assume that for the month of March, my capital expenses are also one lakh rupees. (Maybe I’ve chosen to buy the latest M1 Macbook. One can dream.)
  3. So, my expenses, all told, are two lakh rupees for the month of March 2021.
  4. Assume that Gokhale pays me seventy thousand rupees as my salary. Assume that I augment this income by teaching courses in a couple of other colleges. Let’s assume that I earn one lakh rupees through this recurring income (salary plus visiting faculty income is one lakh per month)
  5. I have no other sources of income. So: 1+2 are my total expenses, against which my total income is 1 lakh rupees (4).
  6. Let’s say I am unwilling to break into any of my savings to purchase this laptop, and choose to borrow the amount instead. That is, no capital income, only borrowing.

So, in essence, the amount that I need to borrow after all possible sources of income have been thought of, in order to meet my total expenses…

That borrowing is my “fiscal deficit” for the month of March 2021.

Homework: to check if you have understood this, try reading the budget at a glance document, and see if you get how Nirmala Sitharaman and team arrived at the fiscal deficit for the government. Page 3 in the PDF.*

OK, so now we know what the fiscal deficit is, and how to go about arriving at it. But is a high fiscal deficit a good thing or a bad thing, and how does one decide?

Well, it depends on what you are borrowing for! For example, as I often say when I am talking to students, they are and should be running a fiscal deficit in their own, personal lives. They’re spending money (rent, food, movies, college fees) but not earning anything at the moment. The idea is that this money is being spent in order to acquire skills that enable them to earn much more in the future. Much more, in fact, than they spend on acquiring that education – or that, at any rate, is the plan.

But what if they instead spend an equivalent amount of money, but not to acquire an education. They spend this money, instead, on buying a Honda Gold Wing. (Yes, I know education isn’t quite that expensive just yet.)

That would be problematic, because you are taking on debt, but for acquiring a depreciating asset (a bike that gets worse over time) and not an appreciating one (your education and your years of experience get more valuable over time).

Or as Rathin Roy put it in a recent Business Standard column:

If the government is merely borrowing to fund consumption expenditure then this is difficult to justify.

https://www.business-standard.com/article/opinion/political-economy-of-fiscal-responsibility-121010701581_1.html

and a little while later, in the same piece…

For example, the “golden rule,” which states that governments must finance consumption expenditure out of revenue receipts and borrow only for investment.

https://www.business-standard.com/article/opinion/political-economy-of-fiscal-responsibility-121010701581_1.html

There is much, much more to take away from Rathin Roy’s piece, of course (and I’ll write a follow-up piece later this week) – but as a first step towards understanding fiscal deficits, this is more than enough.

*If, for whatever reason, the budget at a glance document is not clear, let me know in the comments below. If more than ten people are interested, happy to arrange a quick video call about it (because, you know, there have been so few of ’em this past year!)

The Union Budget: The past, the process and the expectations for 2020

There’s this nagging sense of dissatisfaction: I have spent more than my usual allotment of time coming up with today’s post, and that’s because I have still not been able to find the perfect way to kickstart today’s five links.

I was looking for a nice, easy-to-read and yet informative article about the Union Budget: what is the finance bill, what is the importance of Article 112, what is the process behind the budget being formulated every year, how the budget fits into the medium term fiscal policy – the works. Well, as it turns out, to the best of my knowledge, there is no article that fits (pardon the pun) the bill.

Hence the nagging sense of dissatisfaction. Still, on that rather dispiriting note, here we go: five links about the Union Budget

  1. Moneycontrol to kick things off, on the process behind the budget. Again, not great, but lets run with what we’ve got!
    ..
    ..
    “”The budget is made through a consultative process involving ministry of finance, NITI Aayog and spending ministries. Finance ministry issues guidelines to spending, based on which ministries present their demands. The Budget division of the Department of Economic Affairs in the finance ministry is the nodal body responsible for producing the Budget.

    How is the budget made? Budget division issues a circular to all union ministries, states, UTs, autonomous bodies, departments and the defence forces for preparing the estimates for the next year. After ministries & departments send in their demands, extensive consultations are held between Union ministries and the Department of Expenditure of the finance ministry.”
    ..
    ..

  2. “Boost to spending can revive the economy, which will improve the returns of equity mutual funds. However, a possible surge in inflation poses a key challenge. A careful tightrope walk is what is required.”
    ..
    ..
    Macroeconomics – and I may have said this before, stop me if you’ve heard it – is hard. This article is a classic example of “On the one hand/ but on the other hand…”
    ..
    ..
  3. “An MTBF is a set of institutional arrangements for prioritizing, presenting, and managing revenue and expenditure in a multiyear perspective. Such a framework enables governments to demonstrate the impact of current and proposed policies over the course of several years, signal or set future budget priorities, and ultimately achieve better control of public expenditure. An MTBF, therefore, does not refer solely to the actual numerical multiyear revenue and expenditure projections and restrictions presented alongside a given budget. Rather, an MTBF comprises all the systems, rules, and procedures that ensure the government’s fiscal plans are drawn up with a view to their impact over several years.”
    ..
    ..
    MTBF stands for Medium Term Budget Framework. We’ve got one of our own! Dr. Vijay Kelkar helped prepare it. The point is this – and any corporate leader will tell you it’s importance – never look at a budget as a stand-alone exercise. It fits into a broader, more long term scheme of things. And we in India need to be aware of the more long term scheme of things. Except, uh…
    ..
    ..
    “The idea at the time was that the Ministry of Finance would think on a one-year budget horizon, while the Planning Commission would think about deeper issues in public policy formulation wielding an array of different instruments. Now that the Planning Commission has been disbanded, we will need to build a medium-term budget system that incorporates both points of view. There is a need to clearly define the role and function of NITI Aayog in this new environment, so as to fill these gaps in the mainstream policy apparatus”
    ..
    ..
    That excerpt is from a book that perhaps every student of economics should read: In The Service of the Republic, by Vijay Kelkar and Ajay Shah.
    ..
    ..
  4. “However, data on revenue available so far suggests that the government has very little fiscal space for any significant growth stimulus. If the government’s off-budget liabilities (or withheld payments) are taken into account, the central government’s real fiscal deficit could end up being as high as 5.5% of gross domestic product (GDP) in the current fiscal year, a Mint analysis of public accounts suggests.”
    ..
    ..
    This is old news to folks who have been following Union Budgets for a while, but might come as a surprise to those of you who are just now discovering the hidden delights of this sport: our fiscal deficit numbers aren’t – and haven’t been for a very long time indeed –  exactly crystal clear.
    ..
    ..
  5. “To cut a long story short, there is very little that the government can do in the budget to revive the Indian economy. The government budget is, ultimately, a financial account. And financial accounts, ultimately, are financial accounts and nothing more. Keynes’s formula doesn’t always work, at least not in the way it should. ”
    ..
    ..
    I’ve cut to the chase and excerpted the last paragraph from this excellent piece by Vivek Kaul, but you shouldn’t – read the whole thing very, very carefully indeed. I have a couple of points to nitpick here and there, but the broad thrust of the article I can’t help but agree with completely.

India: Links for 14th October, 2019

  1. An interview with Amartya Sen.
    ..
    ..
  2. Amazon is planning on entering the food delivery business in India. This ought to be fun.
    ..
    ..
    ““We have disrupted every business we have entered, be it ecommerce, payments or entertainment,” a senior Amazon executive told Moneycontrol on condition of anonymity.The launch is slated to happen around Diwali at the end of this month.”
    ..
    ..
  3. Let’s drop the pretense that India’s fiscal deficit is 3.5% of GDP. Let’s drop the target itself. And the article doesn’t say it, but I have always wondered, why divide by GDP in the first place?
    ..
    ..
    “Even if these changes don’t deliver credible budgeting, there is no great virtue in stipulating that 3 per cent is the desired level of fiscal deficit at the Centre. As T.C.A. Srinivasa-Raghavan has argued more than once in these pages, that number was simply copied from the European figure, although the economic context for India is radically different from that in Europe.”
    ..
    ..
  4. An analysis of Yes Bank.
    ..
    ..
    “Yes Bank – The “Kohinoor” of Rana Kapoor has seen him exit in an unglamorous way. He had pledged the stock in favour of his daughters’ borrowings, and the lenders decided to selll. The stock fell 25% in a day, and hit a 10 year low at Rs 30.”
    ..
    ..
  5. A short, and entirely positive review of Devendra Fadnavis’ tenure.

India: Links for 17th June, 2019

  1. “A changing global order, energy transitions and climate change and rapid technological advancement – India’s next government has the difficult task of steering the country through an interesting and crucial time. India 2024: Policy Priorities for the New Government, is a compendium of policy briefs from scholars at Brookings India, which identifies and addresses some of the most pressing challenges that India is likely to face in the next five years. Each policy brief is based on longer, in-depth and academically rigorous publications from the scholars.”
    ..
    ..
    An excellent set of links to bookmark and keep handy to get a useful set of information about a) where India is today, and b) what she might need to do in terms of policy reform.
    ..
    ..
  2. “While some of these issues can be resolved only in the next base-change exercise, greater transparency on the methodology and better data dissemination standards can help improve the credibility of the official GDP numbers. The CSO, which has now been merged with NSSO, can learn from the latter’s dissemination policies and start releasing unit-level data for all databases used in national accounts estimation (including MCA-21) in a machine readable format so that independent researchers can assess the quality of the data being fed into national accounts.”
    ..
    ..
    Here’s a useful thumb rule to keep in mind when it comes to thinking about GDP. If the exercise doesn’t give you a headache, you haven’t thought hard enough about it. I am joking, of course – but only just. In this article, you get a sense of the myriad problems with the measurement of GDP in India. As the author of the piece above has mentioned on Twitter, what we need is a more reasoned discussion about how to measure economic data in this country, rather than fall into partisan debates of a political nature.
    ..
    ..
  3. “Here is our contention: How far and how fast we can go below current 3.4 per cent as far as the centre’s fiscal deficit is concerned against the current demand slowdown? Do we stay put at 3.4 per cent (assuming it is met) for the first two years of the current government and then move down aggressively, as growth comes back to the system? We propose a radical shift in thinking as far as fiscal is concerned. The alternative to targeting fiscal deficit is that like most advanced economies and several emerging market economies India should target a structural deficit, which serves as an automatic counter-cyclical stabiliser.”
    ..
    ..
    Lots to take away from this review of an article penned by two authors worth following in their own right, but rather more useful as a way to realize that this is how articles ought to be read: critical reading is exactly this.
    ..
    ..
  4. “The government has completed laying optical fibre cables across more than 100,000 gram panchayats in the first phase and had aimed to complete connecting the remaining 150,000 councils by March 2019. The second phase has seen “zero progress”, according to government officials close to the matter. Pained by poor utilization of digital infrastructure, the Telecom Regulatory Authority of India (Trai) suggested auctioning BharatNet infrastructure on an “as is where is” basis after a meeting held in December at the prime minister’s office to take stock of the mission.”
    ..
    ..
    Livemint on what needs to be done to revolutionize access to the internet even more in India. The role of gender in this case was not something I had thought about before, read the article to find out more. The bottom line is that we have come a long, long way – but also that there is a long, long way to go.
    ..
    ..
  5. “There could be no compromise over values. And to understand those values, he rediscovered the wisdom from India’s ancient stories to bring clarity to our ambiguous present. And thus Karnad told us the meaning of what it means to be human.”
    ..
    ..
    Livemint again, and this time it is Salil Tripathi mourning the passing away of Girish Karnad. RIP.

Links for 13th March, 2019

  1. “For most projects I’ll never look at anything in ARCHIVES again. But of course it’s easy to do so if I want to. And the fact that it’s easy is important, because it means I don’t have nagging concerns about saying “this is finished with; let’s put it in ARCHIVES”, even if I think there’s some chance it might become active again.As it happens, this approach is somewhat inspired by something I saw done with physical documents. When I was consulting at Bell Labs in the early 1980s I saw that a friend of mine had two garbage cans in his office. When I asked him why, he explained that one was for genuine garbage and the other was a buffer into which he would throw documents that he thought he’d probably never want again. He’d let the buffer garbage can fill up, and once it was full, he’d throw away the lower documents in it, since from the fact that he hadn’t fished them out, he figured he’d probably never miss them if they were thrown away permanently.”
    It is exhausting just reading it, but a very long article from Stephen Wolfram o how he organizes his life. You don’t have to go quite as all out – but you might learn a trick or two about organizing your life better by reading this article. God knows I need all the help I can get.
  2. “Nonetheless, this work suggests a potentially serious problem. Many situations in economics are complicated and competitive. This raises the possibility that many important theories in economics may be wrong: If the key behavioral assumption of equilibrium is wrong, then the predictions of the model are likely wrong too. In this case new approaches are required that explicitly simulate the behavior of the players and take into account the fact that real people are not good at solving complicated problems.”
    If I was to be (excessively?) cynical, I’d say this would mean that economists know nothing. But that isn’t necessarily true – Herbert Simon’s work on bounded rationality come to mind here. But the article is interesting about how to think about excessively complicated stuff – such as life.
  3. “In a low-saving, low-investment economy like the US, it’s a little hard to conceive that its possible for savings and investment rates to be too high for a country’s economic health. But that’s where China has been, and shifting away from established patterns is rarely simple.”
    To range across domains, there is this line from dietary studies that goes something like this: “It is the dose that makes the poison”. But if the USA suffers from too low a savings rate (maybe), China has the opposite problem. And this article does a great job of explaining the how and the why.
  4. “Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth. An analysis of the projected, revised, and actual budget figures since 1991 by Deepa Vaidya and K. Kangasabapathy of the EPW Research Foundation showed that deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets ”
    This should surprise nobody, but budgets shouldn’t be trusted. Households budgets tend to have the same biases and errors that government budgets do, and for mostly the same reason – they’re drawn up by humans, who will be tempted to gloss over inconveniences. This article is full of interesting infographics that help you understand this point better – and also makes the point that an independent fiscal council is both necessary and overdue. I wouldn’t hold my breath.
  5. “But as the global giants arrive, they have been driving up salaries, rents, and reputations. Now some fear that the multinationals that once nurtured this fledgling technology powerhouse are unwittingly damaging the potent but fragile mix of entrepreneurship, military training, and chutzpah that drew them to it in the first place. That, they worry, could prevent it from developing into a mature digital economy.”
    Can you guess, before you click on the link, which country we’re talking about? Reading this article should make you want to read more about industrial organization, low interest rate environments, and urbanization – three of the biggest issues in economics today.