New Delhi: The government is poised to announce a five-year fiscal consolidation plan that will lay down clear milestones for steadily narrowing the gap between spending and revenue.
The plan comes against the backdrop of a series of policy initiatives taken by the Congress-led government in the last fortnight to shore up global investor sentiment.
To foreign investors and credit rating agencies, the medium-term fiscal consolidation plan will signal the intent of the Congress-led United Progressive Alliance (UPA) to press ahead with politically contentious decisions to restore fiscal balance. It will help the Reserve Bank of India (RBI) better plan its monetary policy stance by providing a clearer picture of the fiscal and economic outlook.
After taking charge in North Block on 31 July, finance minister P. Chidambaram stressed the importance of fiscal consolidation. “I would like to make it clear that the burden of fiscal consolidation must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden,” he said.
Soon afterwards, the government increased the price of diesel and capped the supply of subsidized cooking gas cylinders to households at six per year. The government also threw open the doors to foreign direct investment (FDI) in multi-brand retail and eased the norms for FDI in single-brand retail and aviation.
The fiscal consolidation plan is a follow-up to those measures which led to the walkout of Mamata Banerjee’s Trinamool Congress from the ruling coalition.
A high-level panel under former finance secretary Vijay Kelkar has just submitted a report recommending measures to reduce the fiscal deficit, a measure of the difference between government revenue and expenditure that is met by market borrowings. The deficit is expected to overshoot budget estimates that had pegged it at 5.1% of gross domestic product (GDP) in the year to next March.
The recommendations, some of them controversial given that they call for deep cuts in subsidies, have been put up by the finance ministry for debate.
The government, however, intends to press ahead with an announcement of its fiscal consolidation plan.
A person familiar with the policy initiatives being considered by the government said efforts are also under way to cap expenditure targets for the current fiscal year to ensure that any slippage in the fiscal deficit target of 5.1% is minimized.
The Kelkar committee, in its medium-term fiscal consolidation road map, recommended that the fiscal deficit be lowered to 3.9% of GDP by 2014-15. It has warned that the deficit could go up to 6.1% of GDP in the current fiscal without subsidy reforms, while it could be reined in at 5.2% of GDP if such changes are carried out.
The plan will come at a time when the Congress-led government has less than two years of its second consecutive term in office left to run.
A government shouldn’t be preparing a plan another government may or may not be willing to execute, said D.K. Srivastava, director of the Madras School of Economics. But it’s a tacit admission that not much can be done in the next two years by way of reducing the deficit, and a large part of the burden of fiscal correction will fall on the next government, he said.
“For efficient fiscal correction, a road map of less than five years will not be effective. Because the general elections are scheduled in the 2014-15 fiscal year, we will have a break in fiscal discipline in the next two fiscal years,” Srivastava said.
Having been able to stick to the first Fiscal Responsibility and Budget Management targets in his earlier stint as finance minister, Chidambaram seems confident he will be able to make a convincing case for the five-year road map, said Samiran Chakraborty, head of India research at Standard Chartered Bank.
“I think he understands that he does not have too many levers with him to alter this year’s fiscal situation. Hence, it is better to announce a road map which is long lasting and have a greater impact on fiscal deficit,” he said.
The Kelkar panel said that through proper prioritization and efficient use of available resources, the government could save Rs.20,000 crore of Plan expenditure this fiscal.
Chakraborty said cutting Plan expenditure was the easiest thing to do politically. “The way many public sector projects have got delayed, actual spending will be low this year,” he said.
Plan expenditure is not synonymous with productive expenditure, Srivastava said.
“Once the distinction between Plan and non-Plan expenditure is done away with, the government will have more room for comprehensive stock-taking of its expenditure. So, rationalization of Plan expenditure is a more suitable policy in the current circumstances,” he said.
The finance ministry has already announced a 10% cut in non-Plan spending, although savings that can accrue on this front are limited because most of the money budgeted under this head is spent on salaries and interest payments.
Under subsidies, the government may reap some gains from a plan to move to direct transfers of money budgeted for welfare programmes. “Initially it will be restricted to LPG (liquified petroleum gas) and education scholarships,” said the government official cited above.
The government calculates that it will be able to save Rs.800 crore through the cap on supply of cooking gas, largely by weeding out illegal permits.