Financial mismangement and Fiscal defecit

In a nation where leaders are larger than life this is bound to happen in yesteryear Nehru Indira hegemony kept every thing under their control rather than efficient market control. They just keep control of economic syatem to feed their socialist agendas much popular Garibi Hatao kind, but populist program has price to pay. The UPA govt is also doing same with two major populist Programm NREGA, Farmer subsidy and now nailed the coffin with Financial stimuli package.

Every populist program has some cost involve but here the urge to buy out rural voter is more apparent as Atalji was routed because of them. this kind of hegemony on financial program by the UPA to feed their loyal Voters and not much for welfare of sate as a whole.

Now result,

"The financial crisis is not just slowing down India's economy, but is also leading to a deterioration in India's fiscal position and with government spending likely to continue, the rating agencies say that India may face a downgrade.

Finance Minister Pranab Mukherjee's interim budget has confirmed the worst fears of economists that India's fiscal deficit is ballooning.

According to financial firm, Goldman Sachs, India’s combined fiscal deficit at around 11 per cent of GDP is now among the highest in the world and is unlikely to come down in the next few years.

Also, global rating agencies like Moody's, Fitch and S&P have warned that India's rating may be downgraded.

Aninda Mitra, Senior VP, Moody's, said, “Borrowings not only in India but other markets, too, are going up. But in India the situation is particularly bad. The deficit may actually be 11 per cent or higher.”

Meanwhile, policymakers insist the rising deficit is expected, given the government's increased spending.

Montek Singh Ahluwalia, Deputy Chairperson of Planning Commission, said, “I should say it’s a cause of congratulations. All of you who have been asking for a fiscal stimulus should congratulate the government that you have been given a fiscal stimulus. It’s impossible to have a fiscal stimulus and not increase in deficit.”

On being asked to comment on the rating agencies’ have warning that India's rating may be downgraded due to high fiscal stimulus, he said, “Frankly, the track record of rating agencies is quite lousy.”

However, at a time when most governments are pumping in a lot of money to revive their economies, spending is going up everywhere and India like many other countries may have to live with this deficit disorder" [source http://profit.ndtv.com/2009/02/22203936/Indias-deficit-among-the-high.html]

Now this is concerns hown by other Important autonomous agency of India, hence it is not an spokesman of govt unlike Mr Montek, they have also suggest same and they are not credit agency [CRAs] also, while I must make clear one more point which Montek has raised that CRAs failed only in one product so we call them lousy what about Govt which also have numerous program funded by taxpayers money and they got doomed.Comptoller Auditor General [CAG] says Centre manipulating fiscal deficit figures not appropriately reflecting them in Union Budget

"It is official now. The UPA Government is manipulating fiscal deficit figures and will leave behind huge burden on future regimes by its fiscal mismanagement. The Comptroller and Auditor General (CAG) has criticised the Centre for transferring significant liabilities to future generation without appropriately reflecting them in the Union Budget. The CAG report, placed in Parliament on Friday, has exposed the Government’s mismanagement that has led to fiscal imbalances by not figuring massive amount of petroleum, fertilisers and FCI bonds.

Blaming the Government for deviating from the norms of the budget, the CAG has pointed out that budget documents on issuance of bonds/securities by the Union Government is not taken as part of budgetary expenditure/receipts.

“As a result, not only the deficits in the budget are understated, it also raises the issues of transparency in fiscal operations and inter-generational equity in fiscal management of the Government,” observes the Auditor General.

Pinpointing the Government for this escapism, the CAG has observed that such practices were rampant in issuing bonds. “For instance, the Government’s outstanding liabilities on account of Petroleum Bonds alone has consistently increased and stood at Rs 71,288 crore as on 31 March, 2008, thereby transferring significant liabilities to future generations without appropriately reflecting them in the Union Budget,” said the report.

Stating that the Government’s attitude went against ensuring effective parliamentary financial control, the CAG’s report has described as unfair practice avoidance of the figures relating to high value bonds from the budgets. Advocating for transparency in the financial management, the CAG said the Government avoided the figures of crores worth of bonds from the ‘Budget at a Glance’ and put on ‘the off-budge items as below the line items’ of the ‘Budget at a Glance’.

Observing the frequent issue of bonds, even for public sector banks operations, the CAG said: “The issuance of bonds has been resorted to frequently for financing not only fuel, food and fertiliser subsidies, but also deferred liabilities with regard to bank loan waivers and contribution to capital of public sector banks.”

The CAG has observed that the significant quasi-fiscal transactions to finance recurrent revenue expenditures through ‘de facto borrowings’ not only created apprehensions about the quality of the fiscal consolidation process that is underway, but also raised the issue of transparency in fiscal operations and inter-generational equity in fiscal management and long-term macro-economic stability’.

Detailing the status on the issue of all bonds for the past five years, the CAG observes that it was evident from the trends that the Union Government has been issuing securities as an integral component of restructuring plan of nationalised banks and other domestic financial institutions such as UTI, IDFC, IDBI as well as to IMF thereby ‘creating extra budgetary liabilities.’

“The extra-budgetary items have, however, become a significant component of liabilities in the recent past. The Central Government, besides providing explicit subsidies on petroleum, food and fertilisers, has also been periodically issuing special bonds to the oil marketing companies (since 1997-98) and FCI (in 2006-07) and fertiliser companies (2007-08) as compensation towards under-recoveries of their products,” said CAG".
source [http://www.dailypioneer.com/158585/Tricky-UPA-Govt-dumping-huge-liabilities-on-GenNext.html]

Social approach is not only followed by Cash rich Central govt but the defaulter or empty coffer state govt also,look at following example West Bengal government on feb 23 2009, gifted the electorate a Rs 5,106-crore pre-poll package that includes providing rice at Rs 2 a kg to those below the poverty line.

The generosity will cost the state exchequer Rs 1,000 crore. Finance minister Asim Dasgupta dubbed it “extrabudgetary allocation”. While most annoucements will be implemented within a week, some schemes would spill over to the new fiscal, he said. The EC is set to announce the dates for the Lok Sabha polls by the month-end.

Dasgupta denied that the Rs 2-a-kg rice sop — it will cost the government Rs 370 crore since the state has around Rs 1.8 crore BPL cardholders — had anything to do with the polls. “We had already tried a pilot project three months ago.”

He insisted that the announcement had nothing to do with the elections. “It’s recession and the polls are also here. In times of meltdown, we had to expand the domestic market by helping the common man increase his income,” Dasgupta said.

So, the finance minister announced recruitment of 50,000 teachers (to fill up the existing 60,000 vacancies) and a 20 % hike in pay for college and university teachers.

The last, he explained, was as per the UGC’s recommendations.

Till the other day, however, the minister had been insisting that there was a severe funds crunch in the wake of the meltdown. That was also his reason for reimposing sales tax on fuel. On Monday, he claimed to have “calculated some excess generation in the coming budgetary year”. He refused to elaborate.

but atleast interest of public at large and farmers can be understood but waht about corporates to whom govt is doling out stimulus packages a recent article of S A Iyer may be eye opener in this regard

"Should the government assist Indian banks and companies that have

borrowed billions abroad, and suddenly find it difficult to repay maturing

loans because the global financial crisis has frozen money markets? Russia and Mexico have thrown lifelines to their debt-laden companies. Korea has guaranteed $100 billion of foreign bank loans.

Should India do something similar? Only on a very limited scale, if at all. Indian companies have borrowed $150 billion abroad. This is spread over hundreds of companies, and the big borrowers are financially sound. That cannot be said of all Russian tycoons. If global markets remain frozen, Indian companies will surely ask for government assistance.

Other emerging market governments have justified corporate rescues as win-win strategies. The RBI keeps forex reserves mainly in US government bonds, yielding around 5%. But Indian companies today pay 10% or more for dollar loans, and often cannot get loans on any terms at all. If India, like Russia, creates a war chest of $50 billion for rescues, this sum can be switched from 5% US bonds to 8% dollar bonds issued by Indian companies. That will increase the government's income, while easing the credit crunch on companies too.

A win-win situation? No, it would be crony capitalism. Indian companies must learn that foreign borrowing carries unanticipated risks of the sort evident today. In good times, companies have gaily ignored these risks. It is fair and just that they should suffer the downside of foreign debt, just as they benefited from the upside earlier. We must not privatise profits and socialise losses.

Besides, our forex reserves of $270 billion no longer look so large. Foreign institutional investors could pull out another $50-80 billion from our stockmarkets, creating a run on the rupee. That will slow or paralyse remittances from overseas Indians, which provided an invaluable $42 billion last year. Unlike Russia, we must use our reserves carefully and discourage crony capitalism.

Having laid down this principle, we can accept the case for exceptional action in exceptional circumstances. When markets freeze in a panic, there is a case for government intervention until the markets unfreeze. But it should be limited in duration and volume, and involve penal interest.

Indian banks now have hundreds of branches in many countries. In India, they get money mainly from deposits.
But abroad, they borrow from wholesale money markets, and re-lend this to their clients. In normal times, they roll over their borrowings - that is, they borrow afresh to repay old loans. However, the financial crisis has frozen markets and rollovers, stranding Indian banks.

A government committee has reportedly recommended helping bank branches abroad till the panic subsides. It suggests that $5 billion from our forex reserves could be invested in dollar bonds of Indian banks, keeping them liquid in the current storm. The interest rate would be higher than the 5% the government earns on its forex reserves.

If Indian banks fail to repay their dollar loans, the government's own credit worthiness will be affected. The $5 billion proposed is modest, covering only a small part of banks' obligations. So, despite misgivings, i would support this proposal. The rate of interest should be penal, inducing banks to return to global markets quickly and not become addicted to government help.

However, I oppose dollar loans to corporate giants. Tata Motors and Hindalco recently came out with rights issues to raise domestic money to repay huge dollar loans they had taken to acquire Jaguar-Land Rover and Novellis respectively. The rights issues failed dismally. Other businessmen ask, how can we raise money when even Tata and Birla cannot?

Russian tycoons have pledged big stakes in top Russian companies to take dollar loans. The Russian government argues that these stakes in key Russian companies will become the property of foreign banks if the tycoons are not enabled to repay their loans. Indian companies might make a similar argument.

The argument must be resisted. Russian tycoons have been reckless. Indian tycoons must not be encouraged to follow suit, with the assurance of rescues if things go wrong. Indian companies must be forced to confront the risks of huge foreign loans. Nor should India's limited forex reserves be frittered away in repaying irresponsible corporate debts.

Okay, some companies will say, don't give us any dollars from your forex reserves, but at least give a government guarantee to cover our dollar loans till the panic subsides. Without a guarantee, many of us cannot raise money at any price today. So, even sound companies find it difficult to repay old loans.

Normally, I am dead opposed to government guarantees. But in a global panic, there is a case for guarantees if they thaw an otherwise frozen market. The government must charge a substantial penal fee for giving such guarantees. The guarantees should be valid for a maximum of two years, so that companies return to unguaranteed borrowing quickly. Finally, such guarantees should be limited to large, demonstrably solvent companies. This still carries the risk of crony capitalism.

But in a global panic, the risk may be worthwhile".source [http://timesofindia.indiatimes.com/Opinion/Columnists/SA-Aiyar/Swaminomics/Risks-of-crony-capitalism/articleshow/3663481.cms]