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For a return to fiscal sanity

For a return to fiscal sanity
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First Published: Tue, Jun 30 2009. 09 14 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Tue, Jun 30 2009. 09 14 PM IST
Union finance minister Pranab Mukherjee faces an unenviable task. He is saddled with a huge fiscal deficit at a time when demands for further fiscal loosening have reached a crescendo. The argument being that cyclical factors plague the Indian economy and, therefore, the remedy must be geared to overcome these factors. There are economists who say the solution lies in another round of stimuli. This is misguided advice, if it can be called that.
In 2008-09, the combined fiscal deficit of the Centre and the states stood at an estimated 8.09% of the gross domestic product (GDP). In 2007-08, the corresponding figure was 5% of GDP. So, in the span of a single year, the deficit figure jumped by more than 3 percentage points, a deterioration not seen in the last 15-odd years, if not more. The last time the country witnessed deterioration in its public finances was in 2001-02, when the combined weight of the Fifth Pay Commission payout and greater interest burden caused the fiscal deficit to balloon to above 10%. This time around the “real” figure stands even higher at 11.5% if bonds issued to oil and fertilizer companies are included.
Illustration: Jayachandran / Mint
It was precisely at this point that the global financial crisis hit India and, then finance minister P. Chidambaram abandoned the discipline of the Fiscal Responsibility and Budget Management (FRBM) Act. While FRBM targeted revenue deficit at 1% of GDP in 2008-09 and the fiscal deficit at 2.5% of GDP, the figures shot up to 4.5% and 6%, respectively. The Centre’s “true” fiscal deficit is around 8.5%. This represents an increase in the fiscal deficit by 6 percentage points in one year.
So, giving up of FRBM targets is only partly responsible for the fiscal mess: There are structural features that have caused the problem. Much of the reduction in the revenue and fiscal deficits was due to the extraordinary buoyancy of tax revenues from 2003-04 onwards and not due to prudent expenditure management. As in 2001-02, the inability to neutralize (or anticipate) the effects of pay commission awards, the refusal to pass on the burden of oil prices and under-funding of social sector spending has caused the deficits to balloon. The government may claim that the “global situation” has caused the problem that is simply not true. In fact, if one can be a bit more extreme in one’s prognosis, the inability to factor cyclical factors is in itself a structural problem.
Under such circumstances, the dangers inherent in fiscal stimuli should be obvious to anyone. In India, revenue forgone by the government is like money with wings, one that can’t be netted again.
Should the government tighten its finances? Tell us at views@livemint.com
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First Published: Tue, Jun 30 2009. 09 14 PM IST