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Expensive consolidation

Expenditure cuts are being inflicted on plans necessary for growth; this is an unhappy trade-off
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First Published: Sun, Feb 03 2013. 08 09 PM IST
Illustration by Shyamal Banerjee/Mint
Illustration by Shyamal Banerjee/Mint
Given the abandon with which finance ministers have issued deficit numbers in recent years, the countdown for the undoing of these figures begins no sooner than they’ve been issued. The same scepticism marked the target for 2012-13 at 5.1% of gross domestic product (GDP). Things may be a bit better this year. There is a good likelihood that fiscal slippages may be arrested this year. The issue, however, is at what cost.
One argument against aggressive fiscal consolidation in India in the past year or so has run along these lines: in the face of tight monetary conditions, any cutback in government expenditure will only hurt growth. There has, however, been a grudging consensus that some bit of painful re-adjustment was inevitable as the government had penned itself into an adverse policy mix. At first sight, the government appears to be moving in that direction. The upward revision in fuel prices and the monthly re-adjustment of diesel prices until the losses due to subsidies are reduced to tolerable level hinted at that. But a closer look at the print does not make for happy reading.
In the first nine months of fiscal 2012-13, the Union government had already touched the 78.8% figure for the budgeted fiscal deficit. The figure for 2011-12 was 74.7% and that for 2010-11, a much lower 45.8%. But take a look at the expenditure pattern. During this period, non-plan expenditure—subsidies, interest payments, wages and salaries—to the tune of nearly 72% of the budgeted figure had already been incurred. In contrast, plan-expenditure stood at just 57% of the budgeted amount. In the previous year, for the same period, the non-plan expenditure stood at 70% and the plan expenditure at 67%. In other words, the axe is falling on plan expenditure.
The government’s reasons for doing what it is are clear. At the moment, India’s current account deficit is very high—in fact it is unprecedented in the past decades. There are, thus, questions on the country’s credibility. Warnings by ratings agencies are by now normal. The government wants to send out a clear signal that it is serious about fiscal consolidation to calm foreign investors. The way to do this is to curb non-plan expenditure and impose harsh limits on subsidies. Instead, expenditure cuts are being inflicted on plans and programmes necessary for growth in the medium-run. This is an unhappy trade-off.
Is India approaching fiscal consolidation in a wrong manner? Tell us at views@livemint.com
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First Published: Sun, Feb 03 2013. 08 09 PM IST
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