A growing problem in the national Budget

A growing problem in the national Budget

The embattled Manmohan Singh government has a lot to worry about right now, but it also needs to keep a watch on national finances. The recent news here has not been very good.

The gap between government revenues and spending is quite likely to be larger than what was budgeted for in February. Finance minister Pranab Mukherjee said in his budget presentation that the fiscal deficit in the current fiscal year would be kept at 4.6% of gross domestic product (GDP), lower than the 5.1% of GDP achieved in the previous year.


News Report

At 7.7%, GDP grows slowest in 6 quarters


The latest data released by the government on Tuesday shows that budgetary discipline has slipped in the first four months of the fiscal year, with the fiscal deficit in April-July more than twice as large as what it was in the same four months of 2010. The fiscal gap of 2.2 lakh crore is around 63.4% of the budget estimate of 3.07 lakh crore for the entire year.

The two main reason for this fiscal slippage: tax collections have been below expectations because of the economic slowdown and non-tax revenues have taken a huge hit because of the lack of progress in privatizations and the absence of the sort of one-time windfall gains that accrued last year from the auction of telecom spectrum. Subsidies too have shot up because of the rise in global crude oil prices.

In its medium-term fiscal plan tabled in parliament in 2010, the government had said that the fiscal deficit would be brought down to 4.1% for 2012-13 and 3.5% for 2013-14. These targets seem increasingly unlikely to be met if the economic slowdown continues and spending is not controlled.

Last week, the Reserve Bank of India had pointedly noted in its new annual report: “ Enduring correction through expenditure compression and better returns on public investments has to be the cornerstone of an effective fiscal strategy. There are clear limits to one–off revenue generation measures over the medium to long run." In short, it will take more than a bumper telecom auction to put India’s public finances back into safe territory.

A high fiscal deficit is not exactly what the doctor ordered in an economy battling high inflation, since it adds to aggregate demand and thus puts further pressure on prices.