The swelling of fiscal deficit by the United Progressive Alliance (UPA) government is there for all to see. It’s quite clear that at 11.5% of gross domestic product (GDP) the combined deficit and off-budget expenditure will leave little fiscal elbow space for the next government. Is this the beginning of a system where one government sets finances in order and the next one splurges blindly?
Illustration: Jayachandran / Mint
Any government at the Centre is bound to be populist to a certain extent—that is the cost of keeping a fractious coalition intact. In spite of that, any government has the wherewithal to rein in expenditure; whether it does or not is where politics enters the picture. There is no escaping the fact that the UPA has been one of the most expensive regimes in India since 1991. In contrast, the National Democratic Alliance (NDA) appears to have been a model of fiscal rectitude.
Even a cursory look at the data shows this. A year after it took over the reins of government in 1998, the NDA posted a fiscal deficit of 5.4% of GDP in 1999-2000. By the time it exited government in May 2004, this figure was well on its way down to 4% in 2004-05. In any case, revenue deficit, the more acute measure of government profligacy, never crossed the 4.5% mark under the NDA’s watch. It bequeathed a low figure of 2.5% of GDP to the UPA in 2004-05.
Five years later, the picture has reversed. The “official” revenue deficit for 2009-10 is expected to touch 4% of GDP. Off-budget items alone constitute 2% of GDP.
What will the next government do? In any case, irrespective of its political complexion, it will have to eschew profligacy. But the more important question is: What motivation will such a government have to set government finances in order, more so if it is an NDA government? Given that Indian elections increasingly have the character of a plebiscite, governments tend not to come back to power, especially at the Centre.
With this in mind, why should a new regime set finances in order when it faces an uncertainty at the hustings?
Given that the core of the NDA, the Bharatiya Janata Party, is considered the conservative wing of the Indian political party system, one may say that it tends to be fiscally conservative. But that argument is in danger of running aground when it knows that its main rival will reap the benefits of its fiscal conservatism. High deficits pose grave macroeconomic dangers, and it is time political parties arrived at an agreement to separate the politics and economics of this process—if not for themselves, then for India at least.
High fiscal deficit: a sign of political recklessness? Tell us at firstname.lastname@example.org