Speaking in New Delhi last week, the International Monetary Fund’s managing director Dominique Strauss-Kahn made a case for a fiscal stimulus to pump start economies such as the US that are struggling to cope with the fallout of the sub-prime mortgage crisis. The underlying policy implication is to step up government spending and, in the process, boost economic demand in the system. In the Indian context, except for the last decade, economic growth has been primarily powered by government spending. But because this has come without any matching growth in revenues, it has meant running up huge fiscal deficits, or gross borrowings. Since this is increasingly monetised, it has led to the creation of a monetary overhang and is also one of the prime reasons for pushing up the cost of capital or interest rates in the economy. More recently, the government has sought to curb this practice by putting down voluntary caps on the fiscal deficits. While this worked initially, there are signs that the situation is once again deteriorating—especially, since the ruling United Progressive Alliance, or UPA, has begun to resort to the pernicious practice of off-balance sheet transactions to work around these voluntary caps. Mint takes readers through recent expenditure trends, including a focus on the marquee programmes of the UPA, as well as the government’s efforts to curb the fiscal deficit.
Compiled by Paromita Shastri and Sangeeta Singh.