Global Fiscal Situation is Not very Grim

Joint note with Prof. Charan Singh, IIM B

The global fiscal situation is improving with the fiscal deficits declining gradually in most advanced economies despite continuation of fiscal risks and difficult path to fiscal sustainability, according to the Fiscal Monitor released by the IMF on April 16, 2013. In the US, overall fiscal tightening is one of the largest in recent decades and is excessive in light of cyclical considerations. Not-withstanding the weak recovery, fiscal adjustment is expected to continue in most advanced economies like France, Netherlands, Italy, UK, Ireland, Portugal and Greece. In higher debt countries like Japan and the US, specific medium-term plans are urgently required to put debt ratios in downward trajectory. The emerging markets are expected to continue with neutral fiscal policies, given their low levels of debts and deficits but many have still to work on restoring policy buffers and address other medium term concerns. India’s fiscal efforts like reduction in subsidies, spending cuts and tax administrative measures are discussed.

      The process of fiscal consolidation is reflected in the performance of many advanced countries but debt levels continue to be high (Table). The Fiscal Monitor has an interesting discussion on various options to reduce the value of debt – high inflation, restructuring, privatization of government assets, structural reforms, and fiscal adjustment. The foremost of the options is to set out and implement a clear and credible plan to bring debt ratios down over the medium term; an absence of such a plan in the US and Japan are a matter of concern.

   In the US, though fiscal cliff has been averted, durable solutions are still awaited. However, he WEO released two hours before the Fiscal Monitor, questions the impact of debt on economic growth, in the current context of deficient global aggregate demand. Box 1.2 titled Public Sector Overhang and Private Sector Performance offers mixed results on the effect of debt on growth. Debt overhang is generally believed to have growth retarding implications on the economy through various channels like reduced public and private investment. In literature, debt ‘overhang threshold” levels are discussed which give broadly similar results. In contrast, recent studies to understand debt restructuring channels and its distributional effects across different sectors of the economy indicate a reverse result. 

   In an informative box 4, titled Potential Sources of Contingent Liabilities in Emerging Market Economies, two specific examples of China and India are discussed.  In the case of China, the focus is local government financing vehicles financing local infrastructure.  In the case of India, the discussion pertains to the deteriorating quality of credit. Credit growth in Indian economy remained consistently high, with growing concentration on infrastructure in the post crisis years. But with slowing down of the economy, public sector banks seem vulnerable to losses from delayed infrastructure projects as well as dented profits of large companies that account for bulk of bank loans.  Gross non-performing assets in public banks reached 3.3 % of advances in 2012. RBI has taken steps to tighten the reporting requirement in parity with increased capital standards of BASEL III.  Yet there is a fear of rise in contingent liabilities due to India’s state owned enterprises and the large public-private partnership programs.

    Fiscal Monitor has an Appendix titled Reforming Energy Subsidies, summarising another IMF paper (Energy Subsidy Reform: Lessons and Implications; forthcoming) that examines 176 countries. The appendix discusses reforms based on insights from 22 case studies and observes that energy subsidies have wide-ranging economic consequences. Though aimed at protecting consumers, subsidies aggravate fiscal imbalances and exacerbate macroeconomic imbalances. By diluting incentives to reduce domestic energy consumption, incomplete pass-through of increasing international energy prices to domestic consumers worsens the balance of payments further. Subsidies are distorting in the long run and lead to inequitable distribution. Globally, energy subsidies are pervasive and impose substantial fiscal costs on the exchequer. Institutional reforms that depoliticize energy pricing, introduction of automatic pricing and phased price increases coupled with measures to protect the poor is recommended.

In India, recent energy price reforms in 2012, are addressing some of the distortions that had arisen in petroleum pricing.  This needs to be extended to pricing of other sources of energy like Natural gas and electricity and other petroleum using sectors like fertilizers.

Table - Select Fiscal Indicators(Per cent of GDP)

 (Source: Fiscal Monitor)

	2012				2013
	Overall Balance	Revenue	Expenditure	Gross Debt	Overall Balance	Revenue	Expenditure	Gross Debt
USA	–8.5	31.8	40.2	106.5	–6.5	32.9	39.5	108.1
Japan	-10.2	31.1	41.3	237.9	-9.8	31.6	41.4	245.4
France	–4.6	52.0	56.6	90.3	–3.7	52.9	56.6	92.7
Italy	–3.0	47.7	50.7	127.0	–2.6	48.2	50.8	130.6
Germany	0.2	45.2	45.0	82.0	–0.3	44.4	44.7	80.4
Brazil	–2.8	37.2	40.0	68.5	–1.2	37.0	38.2	67.2
Russia	0.4	37.0	36.6	10.9	–0.3	36.2	36.5	10.4
India	–8.3	19.2	27.5	66.8	–8.3	19.5	27.8	66.4
China	–2.2	22.6	24.8	22.8	–2.1	22.1	24.2	21.3
South Africa	–4.8	27.9	32.7	42.3	–4.8	27.8	32.6	42.7
Indonesia	–1.3	17.8	19.1	24.0	–2.8	17.6	20.5	23.6
Turkey	–1.5	34.7	36.1	36.4	–2.2	35.6	37.8	35.5