Channel: Economy

Friday, July 02, 2010
Fiscal Condition of India and UK: Time to worry about?
The Economies of world faced a very different fiscal dilemma in recent years.
Tables & Graphs

The Economies of world faced a very different fiscal dilemma in recent years. We have seen the concern for fiscal deficit among all countries. But the global meltdown made this a non relevant issue at least for a year or two. As a result most of the countries discontinued their fiscal discipline to combat the fallout of recession. India and UK were also not exception to this change of stand. In this article, we take a look at the Fiscal health of both the nations.


A look at the table 1(Fiscal deficit, INR) shows that absolute value of Fiscal deficit for India for 2009-10 remains at INR 400996 crore, a value three times the 2007-08 value.2008-09 was the first year in this decade when Indian fiscal deficit crossed the mark of INR 150000 crore. It very clearly shows the government’s intention to resist the global recession by aligning with the world in declaring the stimulus.


A close look at the table below (table 2) clearly reflects India’s commitment in bringing down the Gross fiscal deficit (GFD).It has been brought down from a peak of 6.19% in 2001-02 to 2.7% in 2007-08.Another interesting observation from the same table is that Fiscal discipline which was restored after FRBM 2003, has been virtually thrown out to tackle the menace of Recession. It is very clearly much higher than the average value from 1998-2008.This is the deficit of only central government of India. If we add the state government’s fiscal deficit, this number is likely to shoot up to double digit.


The most important thing to observe is that India and UK Economies are still very different from each other. When UK faced negative GDP growth, Indian GDP not only grew but also had substantially higher GDP growth than that of best of UK in recent years. However both countries witnessed fiscal instability in terms of more borrowing and less net worth and in this context UK was not different from India.


Net borrowing by UK government has also gone up substantially in 2008.Table 3 & 4 clearly establishes the fact that fiscal health of UK is not in great touch these years. There is not much surprise on that. However the issue becomes serious high looking at the volume of borrowing.UK net borrowing which stood at GBP 74 bn in 2008 is more than double of the previous year. The total financial liability went up by more than GBP 150 bn in 2008 to touch a record value of GBP 919 bn. It is a very different thing that reducing the borrowings did not remain the top priority for the British government at this point of time. It was especially significant as UK went down into a recession which took it quite a long time to come out.


A look at the graph below showing change in assets for UK clearly reveals that the government needs a serious look at the fiscal consolidation. In early part of this decade, UK used to be in a situation of positive asset change. Now there is not only change in direction, but magnitude also has climbed up.UK started experiencing negative change in assets from 2002 onwards. The two peaks for this value remain at GBP 42 bn (2008) and GBP 34 bn (2005).Though after a high of GBP 34 bn of negative asset change in 2005, there was a huge fall in this value to GBP 12 bn, a similar expectation this time would be like asking for too much.


As a result of huge liability, the new worth of UK government went as low as GBP 256 bn (table 6), a value not touched in last 5 years. Interestingly the 2007 value was at all time high. Probably this was the time, from when Economic slowdown started showing its effect. A consistent effort by UK government helped it increase its net worth and so it kept moving up from GBP 179.8 bn in 2000 to GBP 354.2 bn in 2007.However, in 2008 the global meltdown forced governments in the world to borrow more to declare the fiscal stimulus for sustaining GDP growth rate.


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