Politics is often more about hope than reality. But as the government’s talk of paring the fiscal deficit shows, hope can get too detached from reality.
On Tuesday, finance minister Pranab Mukherjee said the United Progressive Alliance (UPA) government will, by targeting subsidies, bring the Union government’s fiscal deficit down from 6.8% of gross domestic product (GDP) in 2009-10 to 5.5% of GDP in 2010-11. The government has been making such claims since the July budget, which estimated not just the deficit at 5.5% of GDP by 2011, but also a further scaling down to 4% in 2011-12.
Illustration: Jayachandran / Mint
Even if the downturn is ending, Mukherjee insists on maintaining the Rs1.86 trillion stimulus. Plus there are other factors now that render such economic gymnastics more questionable.
First, if past is prologue, this story doesn’t end well. Former chief economic adviser Shankar Acharya noted in a Business Standard article in July that it took the previous UPA four years to reduce the deficit by 1.2 percentage points—at a time when the economy was booming. Acharya wrote, “A fiscal correction of about 1.5% of GDP in each of two successive years”, as the Budget claims, “has never been achieved in India”.
Second, the UPA is hoping to make as much as Rs35,000 crore from the third generation, or 3G, mobile spectrum auction. But that’s contingent on the auction occurring sometime soon. Comments by the telecom minister last month, as well as a Central Bureau of Investigation raid that has probably shaken that ministry, don’t invite optimism. And Rs35,000 crore clearly isn’t enough.
Third, whatever consolidation the tax policy would have brought about is also up in the air. The draft direct tax code introduced in August may not retain its clarity after industry lobbies and interest groups are through with it. The goods and services tax (GST), it seems, may comprise three different rates, losing the simplicity that could have easily widened the tax net. This GST could help some states’ finances—not reduce the Centre’s deficit by 1.3 percentage points.
Fourth, even if there’s an opportunity to reduce oil or fertilizer subsidies, it needs political will. Since last month, crude is back in the $80 range and may remain there: Even as it becomes fiscally more imperative to deregulate oil prices, it becomes less attractive politically. Fertilizer subsidies can also be rationalized, but that means dealing with entrenched farm lobbies—that too during the worst drought year since 1972.
This is not to say that it is impossible to bring the deficit down. But this task will require large doses of political will. For a government that is unable to resist simple political pressures, this seems to be asking too much from it.
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