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Fiscal Deficit: CAN FM TACKLE CHALLENGE?, by Dhurjati Mukherjee, 9 Apr, 2012 Print E-mail

Events & Issues

New Delhi ,9 April 2012

Fiscal Deficit

CAN FM TACKLE CHALLENGE?

By Dhurjati Mukherjee

 

There has been much discussion on curbing fiscal deficit because of its adverse impact on the economy. Higher inflation and reduction in private investment have been some of the problems arising out of what is termed as ‘fiscal profligacy’. However, for a country like India, where developmental activities in the form of infrastructure upgradation and subsidies for the poor need to be provided, curbing the fiscal deficit is indeed a big problem.

 

On the other hand, to get back to a high growth path coupled with low and stable inflation, the Government would need to reiterate its commitment to credible fiscal consolidation. In this connection, the resent Budget gains significance though there has hardly been any attempt to curb expenditure. Will Finance Minister Pranab Mukherjee be able to carry out his plans or will he be forced to rethink, is the big question. 

 

Before going into the budget proposals, one may note that the Medium Term Fiscal Policy of the 13th Finance Commission, which forecast a zero deficit budget by 2013-14, is unlikely to be achieved. The policy had made it clear that what is needed is “expansionary fiscal contraction”, focusing on expenditure prioritizing. But there has been very little effort to curb government expenditure, specially in unproductive areas. 

 

It would be pertinent to point out the need for rationalizing of staff in all Government departments, which includes officers as well. Moreover, work that could be carried out effectively and efficiently by young professionals, through outsourcing on contract basis, is being carried out by retired persons lacking skill and the energy to perform!

 

It is generally agreed that the present fiscal year (2012-13) is expected to be better and bring about decent economic growth with macro-economic stability. The cyclical corrections are thus likely to be addressed to the form of increased revenue receipts.

 

However, the issue of increasing subsidies still remains, which is quite natural. Two things are of vital importance – one, the fact that subsidies cannot be curtailed to the extent the neo liberalists want as the poor needs these and second, the country imports around 80 per cent of its oil requirements, a huge part of which has to be subsidized. It is rather easy to say that subsidies need to be brought down but keeping in view the welfare objectives, or obligations, of the State, this is indeed a challenging task before the government.

 

Minister Mukherjee has pledged to lower the fiscal deficit to 5.1 per cent of the GDP in 2012-13 from 5.9 last fiscal. In the future, he pledged to keep subsidies below 2 per cent of GDP – and reduce the same to 1.75 per of GDP over the next three  years, which may be difficult to achieve, specially given the expenses on the Government’s food security programme that is expected to start. Moreover, a decline in the fuel subsidy bill by as much as Rs 24,901 crores – a cut of about 36 per cent -- may not be a realistic target even if fuel prices remain static. The decontrol of diesel, as envisaged, may face stiff opposition from the allies of the UPA and, as such, the assumption of Rs 43,600 crores towards subsidy may cross Rs 60,000 crores on a rough estimate.

 

Though Mukherjee assured he would foot the entire bill for food security, while raising food subsidies a little over Rs 2000 crores to Rs 75,000 crores in 2012-13, the saviour for the Government is that the Bill may not turn into law before the Winter Session of Parliament. But even then, the introduction of the programme this fiscal, in a limited way, is certain to keep the fiscal deficit calculations go wrong. When the actual implementation takes place in 2013-14, the deficit cannot be brought down, about which most experts are unanimous in their opinion.

 

It is significant to point out here that the Government has for the first time used a subtle trick to depress its revenue under the Fiscal Responsibility & Budget Management (FRBM) Act by almost 47 per cent. Calling it ‘Effective Revenue Deficit’, a portion of the revenue expenditure has been shown as grants for creating capital assets. Interestingly, the 13th Finance Commission recognized the definitional refinements in respect of revenue deficit and grants for creation of assets as capital grants. In the process, the effective revenue deficit has gone down to 1.8 per cent of the GDP, giving Pranab bragging rights to claim that he has put the country on the road to fiscal consolidation.

 

According to a section of economists, public finances in the country are in a relatively good position. The debt/GDP ratio stands at 6.3 per cent and the interest/budgetary receipts at 31 per cent. These measures and not so much the fiscal deficit are the judicious ways to assess financial position of the economy. For having navigated the economic crisis in India, this is much better than comparable economies such as Brazil, Russia and China.

 

In terms of absolute growth, India has grown at a CAGR of 7.7 per cent since the recession began in 2008 while Brazil has grown at 3.9 per cent and Russia 1.3 per cent. China, while growing faster, piled unsustainable levels of debt and in doing so its debt/GDP stands at 155 per cent now and is likely to hit 200 per cent by 2016 or $ 22 trillion. India has grown while decreasing debt and interest ratios sharply.

 

In the current fiscal, India’s market borrowings would be around 5.6 per cent of GDP (Rs 569,616 crores), which is quite high and may put pressures on monetary, liquidity and debt management. But considering the needs of a growing economy, this possibly cannot be avoided to keep pace with developmental momentum.

 

One cannot deny the fact that keeping in view the huge developmental activity being carried out, public finances are in relatively good shape and the Finance Minister would be able to gear the economy towards at least 7.5 per cent growth this fiscal. However, to keep the momentum of growth, cutbacks in expenditure may be counter-productive. Even developed economies such as Japan (208 per cent), Canada (83.5 per cent), UK (79.5 per cent) and the USA (69.4 per cent) have higher public debt to GDP ratios as do emerging economies like Brazil (54.4 per cent).

 

Though fiscal consolidation may have suffered, it is expected that some methodology would be evolved to ensure that the fiscal deficit does not cross 5 per cent of GDP. However, nothing magical can be expected in a given frame of time. ---INFA

 

(Copyright, India News and Feature Alliance)

 

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