Washing away the red ink

Washing away the red ink
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First Published: Mon, Jul 13 2009. 10 06 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Jul 13 2009. 10 06 PM IST
It is a week since finance minister Pranab Mukherjee presented the first Budget of the new United Progressive Alliance (UPA) government. Opinion continues to be divided about how good the Budget really is, though the balance of opinion is clearly shifting in Mukherjee’s favour.
But there is also a growing consensus: The fiscal deficit (or the difference between spending and revenues) has shot up because of borrow-and-spend plans, and needs to be brought down rapidly if India is not to hurtle into a public finance mess.
Illustration: Jayachandran / Mint
To assuage such fears, Mukherjee also unveiled a “medium-term fiscal policy statement” in the documents that he tabled in Parliament. There, he has promised to slash the fiscal deficit as a percentage of India’s gross domestic product (GDP), from 6.8% this year to 5.5% in the next and 4% two years later.
It will be tough going. There are only two ways a ratio can be reduced: by decreasing the numerator or increasing the denominator. In other words, the government will have to reduce spending, increase revenues or hope for a spurt in growth. The latter seems unlikely as the current global economic recovery promises to be a sluggish one.
That means the deficit will have to be slashed either through better revenues or lower spending. The tax kitty will jingle only if the economy rediscovers its old strength. However, the introduction of the goods and services tax (GST) in April could lead to tax buoyancy that could surprise us.
And what about lower spending? That seems very unlikely. It is hard to see how this government will find the political will to streamline government, hack non-merit subsidies or retire public debt through disinvestments.
Paring the fiscal deficit will thus not be easy. Shankar Acharya, a former economic adviser to the government, noted in a recent column in the Business Standard that “recent history does not support much optimism” as far as fiscal correction goes. He shows how the previous Manmohan Singh government took four years to reduce the fiscal deficit from 4.5% of GDP in 2003-04 to 3.3% (including 0.6% in off-budget items) in 2007-08.
In other words, the UPA needed four years during an economic boom to reduce the fiscal deficit by 1.2 percentage points. It now promises to shave 2.8 percentage points off the deficit in three years during a severe downturn.
It is going to be an uphill task. No wonder the bond markets are still jittery.
Can the government reduce the fiscal deficit to manageable proportions? Tell us at views@livemint.com
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First Published: Mon, Jul 13 2009. 10 06 PM IST