Reserve Bank of India (RBI) governor Urjit Patel, in a recent speech, said our fiscal deficit is one of the highest among the G-20, or group of 20, countries.

This is what he said: “Our general government deficit (that is borrowing by the centre and states combined) is, according to IMF (International Monetary Fund) data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP (gross domestic product) is cited by some as coming in the way of a credit rating upgrade. We have to take cognizance of these comparisons and facts as we go forward to make progress."

He went on to hammer home the point that “Borrowing even more and pre-empting resources from future generations by governments cannot be a short-cut to long lasting higher growth. Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front".

Patel is not known for making speeches. His remarks on the fiscal deficit should, therefore, be taken very seriously, particularly when there is much talk of relaxing the deficit in the budget to offset the impact of demonetisation, although Patel himself carefully skirted any mention of the “demon" word in his speech.

Let us, therefore “take cognizance of these comparisons". Chart 1, taken from IMF’s latest Fiscal Monitor, has the details of G-20’s general government overall balance, or government net lending/borrowing estimates for 2016 as a percentage of GDP. Among G-20 nations, the data show India indeed has one of the highest deficit ratios, after Saudi Arabia, Brazil and Argentina.

The next question to ask is: why is our government deficit so high? Is it because the government is starved of revenue?

That has been more or less the consensus, with the experts all saying the government must raise more revenues.

True, our revenue/GDP ratio looks terrible, compared with developed countries. IMF’s Fiscal Monitor estimates India’s general government revenue at 21.4% of GDP for 2016. Compare that with the UK’s 36.3%, or Sweden’s 48.6%, or even the relatively lower 31.4% of the US. IMF says the average for developed countries is 36.4% of GDP. Contrasted with these countries, our government’s revenue efforts are indeed feeble. But should we compare ourselves with them? After all, the rich can afford to pay more taxes.

According to IMF estimates, India’s per capita GDP in 2016 in current international dollars was 6,658, compared with 42,513 for the UK and 57,293 for the US.

With India’s per capita income at a fraction of that of these countries, there’s not much point comparing their tax efforts. Instead, let’s take look at how our revenue-raising efforts stack up against East and South-East Asian nations. Chart 2 has the details.

What’s interesting about the chart is that it shows India is about middle of the pack when it comes to revenue raising efforts. In fact, Malaysia, Indonesia, Taiwan and the Philippines —all with higher levels of per capita income—have lower levels of government revenue as a percentage of GDP. So, yes, while we could increase our revenue/GDP ratio and the introduction of the goods and services tax will do that, it doesn’t look all that bad given our present level of per capita income.

But all these countries have lower government deficits than we do, although Vietnam’s is close. The answer lies in Chart 3, which shows general government expenditure/GDP for all these countries. Notice that India’s government expenditure as a percentage of GDP is much higher than most other countries in East and South-East Asia. Putting it differently, India’s government expenditure, as a proportion of GDP, is much higher than the average of these countries than its government revenue. The Vietnam government’s tax and spending, as a proportion of GDP, comes closest to India’s.

Yet, in spite of lower expenditure, these countries mostly have higher levels of social welfare indicators than India. That would seem to indicate that our expenditure is wasteful and not targeted well—continuing subsidies, many of them for those who can afford to pay, being a case in point. One big reason is that our debt levels are higher (chart 4) and, therefore, the interest payable on that debt eats up a large chunk of government expenditure. Selling of public sector enterprises and using the proceeds to retire public debt could be one solution.

Gaurav Kapur, independent economist, says now that interest rates have come down, a debt swap scheme, on the lines of the one the Vajpayee government did for the states, could be another idea. And, of course, the efficacy of government expenditure needs to be looked into. It is these factors that need looking into, not quick fixes such as pausing in our road to fiscal consolidation.

There are other things about which Urjit Patel may be wrong, but he’s right about the dangers of a high fiscal deficit.

Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at manas.c@livemint.com.

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