Views | Switch fiscal priorities
Views | Switch fiscal priorities
The forthcoming budget is perhaps the least expected in recent times. Frantic measures to raise non-tax revenues as economic growth, the fiscal mainstay of the new millennium, faltered in 2011-12, have not really helped. Last week’s auction of ONGC shares, despite fetching Rs140 billion, did little to raise expectations. Worse, the lack of investor response (LIC was the only bidder of significance) possibly betrayed more disgust with an unstable subsidy-sharing mechanism for oil firms than the greed contained in the auction’s aggressive pricing.
Next-door neighbour China offers both lessons and opportunities in this regard. Recognizing its inability to sustain its investment-driven, export-led, blistering high-growth model, its leaders have had no hesitation in scaling down their aspired growth rate to 7.5%, which until now was an unbending 8% plus. But recognizing the reality, they are now willing to settle for lower growth, encourage domestic consumer demand and reduce the pressure upon natural resources and environmental pollution.
Would that such hard-headed choices colour the 2012-13 budget. India needs to do the opposite of China. It needs to shift expenditure from subsidy encouraged consumption to asset-creating investments to lead economic growth. It also must move opportunistically and tap the vacuum created by its neighbour’s shift from labor-intensive exports due to rising wages. Such a change of direction will raise India’s productive capacity, reduce the rising demand-supply gap and hence, inflation; it will raise employment levels, while increased incomes and production will widen the tax base with a positive impact upon the fiscal situation. Growth aspirations of 8% plus only make sense in this context, not otherwise.
The government has been living beyond its means for some time now. Even as GDP growth recovered to 8% plus in the two years to 2010-11, the non-reversion of the fiscal stimuli of the preceding two years has undermined faith in India’s capability of running a responsible, countercyclical fiscal policy. The exorbitant rise in borrowing-financed subsidies in a high-growth environment has eroded credibility: market-borrowings funded as much as two-thirds of overall expenditure in 2010-11 and 2011-12, a 20 percentage point rise from the crisis and drought-hit year of 2009-10, while subsidies have more than doubled in absolute terms between 2007-08 and 2011-12.
Public finances have rested too heavily upon economic growth, assuming it will happen in auto mode. Ignoring its faltering drivers, namely investment, has been costly, damaging future prospects too. Ironically, with push coming to shove, it is capital spending that is eyed to deliver savings and reduce the deficit. The 2012-13 budget needs to straighten these warped priorities, institute measures to switch expenditure from consumption to investment and recognize that putting all eggs into the growth basket can be both dangerous and unwise.
Renu Kohli is a New Delhi-based macroeconomist. She is a former staff member of the International Monetary Fund and the Reserve Bank of India.
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