India’s path to fiscal consolidation seems jinxed. Just when revenues exceeded expectations and early Budget meetings were anchored in the theme of fiscal consolidation, comes its biggest threat: a government under siege.
Global crude price is on the rise and the average price of the Indian basket between April and early December, at $78.31, is almost $10 higher than the previous fiscal’s average. Subsidy on retail petroleum products is always the biggest risk left uncovered in the Union Budget.
Estimates of the subsidy are never given upfront, using the excuse that there is no fixed formula to determine it and it will be worked out in due course. While that makes for an opaque Budget, it may not pose a huge risk in normal times.
In normal times, like February ahead of the Budget, the government was willing to raise the administered price of diesel as it felt a growing fiscal deficit exerted more upward pressure on inflation in the long term than a single shot increase in price.
Graphic: Jayachandran / Mint
Today, when the government is under siege in the wake of myriad charges of corruption and mismanagement of the food economy, the long-term gains of fiscal consolidation could be threatened. There are no special interests lobbying for long-term benefits of fiscal consolidation. But there are plenty of political interests arguing against an increase in administered price of diesel or cooking gas.
Meanwhile, international crude price displays a firm trend, quietly adding to the magnitude of India’s oil subsidy.
This is the second time in three years early efforts at fiscal consolidation have been threatened by the structural weaknesses of the political economy. In 2008, after four years of relentless focus on fiscal consolidation, the farm loan waiver in what would have been the last full Budget before a general election partially offset gains. It was compounded by the subsequent rise in international commodity prices and the ripple effects of global financial crisis.
There is no faulting the government’s intent on fiscal consolidation or making low key, but significant improvements in processes to enhance the quality of expenditure. However, fiscal consolidation is always bound to be hostage to short-term interests of political economy, which almost always will overwhelm long-term gains. In the current scenario, it is difficult to imagine the government resisting pressure as it did in February and March to undo the price increase in diesel.
In the current fiscal, the final fiscal deficit figure as a percentage of gross domestic product (GDP) may even be lower than the budget estimate of 5.5% on account of a high growth in nominal GDP. But fiscal consolidation will remain painstaking progress up a slippery slope.
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