Pranab Mukherjee sounded pleased earlier this week when he told a TV interviewer that India’s projected fiscal deficit of 6.8 per cent of GDP in 2009-10 was still better than the 11 per cent projected in the United States. He did not mention the difference in the two countries’ GDPs, and he was not cross-examined about India’s budgeting process, which is in the grip of multiple sclerosis. This ailment is characterised, the dictionary tells us, by “inability to coordinate movements, blurring of vision and an abnormal tingling sensation”.

The abnormal tingling was evident in last Monday’s precipitous fall in the Sensex, which rocketed 52.57 per cent between January 1 and June 30 this year. In itself, that was aberrational behaviour considering that market capitalisation has fallen from a peak of about 140 per cent of GDP in December 2007 to 50 per cent of GDP in February 2009, as the Asian Development Bank (ADB) has noted. In comparison, the Dow Jones Industrial Average has actually fallen from 9,034 on January 1 to 8,447 on June 30, and the Americans know they are not out of the woods.

The warning bells are ringing loudly. Rating agencies have put India on notice for downgrades; Standard and Poor’s cut India’s long-term sovereign debt outlook to “negative” from “stable”. The ADB warned that fiscal stimuli can only have a short-term impact. “At a time of falling business confidence, expansionary fiscal policies could impair the confidence of investors unless clear signals are given that the present large deficits are truly temporary. General government debt is estimated to be 80.7 per cent of GDP (at end-March 2009), indicating little room for fiscal manoeuvre.”

The UPA government’s fiscal profligacy, abetted by the Reserve Bank of India (RBI), has made a mockery of the Fiscal Responsibility and Budget Management Act (FRBMA), which requires the government to cap fiscal deficit at 3 per cent of GDP and eliminate revenue deficit. The finance ministry acknowledges that the discipline imposed by the FRBMA enables the state to channel huge new funding into social-sector spending. The difference this time is that reckless spending has ballooned and lawmakers have become lawbreakers. The Economic Survey noted that the government’s fiscal stimulus, including higher salary payouts to state employees after the Sixth Pay Commission report, equalled 3.5 per cent of GDP last year.