The Union government may give a push to fiscal consolidation in the 2010-11 Budget. A Mint story on Monday (“UPA set to roll out new fiscal reforms”) detailed how the decision to accept the recommendations of the 13th Finance Commission (TFC) on fiscal consolidation may also give a push to reforms. It is tempting to believe that reforms are around the corner. However, a fiscal push should not be confused with reforms and it is the latter that are the need of the hour.
Illustration: Jayachandran / Mint
Is this distinction mere hair splitting? We believe it is not: The motives that power fiscal consolidation and reforms are very different. At 6.8% of the gross domestic product (GDP), the level of fiscal deficit poses many dangers. The government is aware of that and its decision to accept the TFC recommendations has a lot to do with this. Reforms, however, require it to control expenditure and subsidies on fertilizers, food and oil. There are few, if any, signs of that.
The government’s reluctance to accept the recommendations of the Kirit Parikh committee and increase fuel prices; its unwillingness to control food subsidies and its inability to switch to a different, less problematic, fertilizer subsidy regime (the nutrient based subsidy scheme) indicate that it does not want to push reforms.
Its plans to divest some equity from public sector units should be seen against the distinction between fiscal consolidation and economic reforms. The proceeds from disinvestment will not lead to technology transfers from buyers of government equity or handing over of government companies to better equipped managements. This money will only help plug the fiscal gap: this cannot be called a reform by any stretch of imagination. In fact, it bears close resemblance to the old trick of managing the administered price mechanism: Whenever you run short of money, just raise the price of petrol by a few rupees. It does not remove the underlying inefficiency of the system.
Disinvestment can take the form of a reform if it meets two conditions. First, the stake sale should be of a size that will enable private entities to take over the company’s management. Two, the proceeds are used to build physical infrastructure, or fuel investment demand in the country and not used for consumption. The government does not appear to be in a mood to do that. It wants to spend money on social sector programmes. These only fuel consumption.
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