Part of the reason why this opportunity goes abegging is the obsession with controlling the fiscal deficit. This comes as part of the neoliberal ideological baggage that the economic-policy establishment carries. Mr. Sinha, in his budget speech, provided a common sense explanation for this obsession. To quote him: “Why am I so concerned about the fiscal deficit? Let me try to explain.  The total receipts of the Central Government in the current year according to BE are about Rs. 281,000 crore. Of this amount Rs. 72,900 crore is States' share of the Central taxes and grants. The Central government is, therefore, left with Rs. 209,000 crore. On the expenditure side, about Rs. 101,000 crore was to be spent on interest, Rs. 59,000 crore on defence, Rs. 23,000 crore on major subsidies and Rs. 16,000 crore on pensions. The net amount left for meeting all other Government expenditure totaling Rs. 123,000 crore was, therefore, only Rs. 12,000 crore, I have, therefore, to borrow Rs. 111,000 crore in the current year to make both ends meet. The most worrisome aspect is that over Rs. 77,000 crore was for financing unproductive revenue expenditure. This will add to my interest burden next year forcing me to borrow more and ultimately fall into a debt trap. I am deeply conscious of the burden which is falling on future generations, by our extravagance. I cannot allow this situation to continue.”
 
This rather simple explanation of his and the government's plight is, of course, ridden with assumptions that render the argument trivial and wrong. To start with, the assumption is that receipts are given. What the Minister failed to note is that between 1989-90 and 1999-2000 the Centre's net tax revenues to GDP had declined from 7.9 to 6.6 per cent, or by 1.3 percentage points (Chart 2). This decline occurs in a context where India's tax-GDP ratio is low compared to many other developed and developing countries, providing a case for raising the tax-GDP ratio over time. Instead what we have is a decline.
Chart 2 >>
 
Two factors underlie this decline. First, huge fiscal concessions given to the corporate sectors and the upper income groups in the name of encouraging private initiative. Second, significant reductions in customs duties as part of trade liberalisation. The net result has been the shrinkage of the tax base of the government. Even if net tax revenues remain at the 6.6 per cent of GDP level in 20001-02, as the budget assumes they will, revenue foregone as a result of liberalisation would amount to Rs. 28,000 crore.
 
The second problem with the Finance Minister's reasoning is that the observed rise in interest payments was unavoidable given the level of borrowing resorted to in the past. However, what is missed here is the fact that in recent year's financial reform has involved doing away with low interest borrowing by the central government from the Reserve Bank of India against the issue of ad hoc Treasury Bills. In 1989, around 30 per cent of the central deficit was financed in this manner at interest rates which were far below those payable on borrowing from the open market.
 
It has been argued that monetising the deficit in this manner reduced the autonomy of the central bank and its ability to use monetary policy as an instrument for growth and against inflation. In practice, central bank maneuverability has been considerably constrained by the need to buy dollars and accumulate huge foreign currency reserves. This has become necessary in order to prevent the rupee from appreciating in the wake of surges of portfolio capital inflows facilitated by financial liberalisation.
 
Thus while the autonomy of the central bank has not increased post-liberalisation, the policy of forcing the government to borrow from the open market has substantially increased the interest burden on the budget. Our calculations show that if the share of central bank borrowing in the financing of the fiscal deficit had remained at its 1989-90 level, the saving in the form of the interest burden would have amounted to Rs. 15,698 crore (Chart 3). This, together with the revenue foregone on the tax front noted above, amounts to more than Rs. 44,000 crore or as much as 40 per cent of the shortfall in revenues that the Finance Minister has been forced to cover through borrowing.
Chart 3 >>