Stand-in finance minister Pranab Mukherjee will stand up today in Parliament and try to explain a spectacular self-goal: how a government that has been lucky to rule in the midst of an unprecedented economic boom and blessed with buoyant tax revenues can still leave behind a public finance mess that brings back dark memories of 1991.
Illustration: Jayachandran / Mint
The chances are that this will be explained away by two developments. One, the decision to protect domestic consumers from the effects of high global oil prices through 2008 sent fuel subsidies through the roof. Two, the global economic crisis has forced the Manmohan Singh government to spend in order to protect domestic demand and business confidence.
But the fiscal irresponsibility started far before these two events hit India. There was little attempt to keep spending under control. Most of the fiscal improvement since 2004 was because of soaring tax revenues that moved in tandem with overall economic growth. This newspaper has for long been critical of the way the government handled its finances. Some of its budgeting would not pass the corporate governance test in case it was a company.
For example, the last budget presented by then finance minister P. Chidambaram in 2008 did not account for several commitments made to various politically influential groups: the rural jobs scheme, the hike in government pay and the farm loan waiver. Yet, he showed a relatively slim fiscal deficit of 2.5% of gross domestic product.
There should be no prizes to figure out that the government will overshoot the deficit target by a wide margin. The two supplementary demands for grants totalling nearly Rs1.5 trillion already told us that the previous budgeting exercise was a sham. Most private sector economists expect the consolidated deficit of the Union and state governments to cross into double digits this year—very close to the levels that toppled India into an economic crisis in 1991.
This crippling deficit could not have come at a worse time. The government needs to spend right now and bring down interest rates to support domestic demand. Its sky-high deficit and the huge extra borrowing this will entail will surely come in the way of a credible fiscal stimulus. We already know how the second stimulus package announced in January had little actual spending.
We are not fiscal fundamentalists, and recognize the fact that deficits have to rise in bad times. But the deficits that the government bequeaths the nation after a huge economic boom cannot—and should not—be taken lightly.
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