Spat signals move to fiscal correction is on

Spat signals move to fiscal correction is on

New Delhi: The finance ministry is refusing the increase in allocations desired by the Planning Commission to fund annual expenditure in 2010-11, a clear signal of its intent to return to the path of fiscal rectitude in the next budget.

Some of the increase sought is, interestingly, for meeting the funding needs of politically sensitive social programmes.

“While the Planning Commission has been asking for a 18-19% rise in GBS over last year, the finance ministry is not willing to spare more than 15%," said a government official familiar with the development who did not want to be identified given the nature of the ongoing discussion between the ministry and the commission.

This person added that a meeting on GBS scheduled for 6 January at the Prime Minister’s Office has been postponed. “A fresh date is yet to be decided."

Meanwhile, Planning Commission deputy chairman Montek Singh Ahluwalia told reporters on Monday that the commission would start interacting with various ministries over the next two to three weeks on demands for GBS for the next fiscal. “Sometime between now and maybe early February, we will have a number (for GBS)," said Ahluwalia.

The Business Standard reported on Monday that various ministries have asked for an 82% increase in GBS in 2010-11 to Rs4.09 trillion over the budget estimate of Rs2.24 trillion in 2009-10. GBS in 2009-10 was 16.6% higher than the revised estimates of Budget 2008-09.

“The essence of the Planning (Commission’s) function is that we will be discussing with the finance ministry on what is available, but then we will be trying to match the demands to the available resources," Ahluwalia said.

“Government investments have not been rising in the last two years and the Planning Commission is justified in asking for more allocation, especially for investments in infrastructure such as roads and irrigation projects. Fiscal stimulus has just led to rise in consumption not capital formation and states depend a lot on the Planning Commission to improve infrastructure," said Y.K. Alagh, a former member of the Planning Commission.

However, he added that to fund programmes such as the Food Security Scheme and National Rural Employment Guarantee Scheme, which promises 100 days of employment for one member of each family living below the poverty line, the finance ministry should look at ways to mobilize more revenue.

The Congress-led United Progressive Alliance government has employed a combination of big spending and an easy monetary policy to start an economic recovery. The latest data suggests that this strategy has worked and the economy is expected to do slightly better than initially expected and record growth of around 7% in this fiscal.

However, the step-up in expenditure combined with a setback to tax revenues has created fiscal pressures. The country’s fiscal deficit, or the excess of expenditure over revenue that’s met through borrowing, is at a 16-year high as a percentage of gross domestic product. The deficit is set to widen to 6.8% of India’s gross domestic product (GDP) in the year to March, as government spending balloons. According to the Fiscal Responsibility and Budgetary Management (FRBM) Act, the government was required to cut its fiscal deficit to 3% of GDP by fiscal 2009. But in view of the unprecedented circumstances, the government had decided to suspend FRBM with the promise that it would return to the path of fiscal correction soon.