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 (Jayachandran/Mint)
(Jayachandran/Mint)

Opinion | A doubtful return to the fiscal glide path

After two years of apparent dithering, the government claims to have rededicated itself to keeping its fiscal deficit in control. But fulfilling this commitment is not easy

Of late, a swelling tide of opinion across India has suggested that Prime Minister Narendra Modi doesn’t need the economy’s backing to win general elections anymore, if at all he ever did. The polls of 2019 were not about “the economy, stupid", goes the argument. Yet, it was not for nothing that the government sounded the alarm over the grim economic scenario soon after. Commercial India needed to churn out value faster, it was made amply clear. While the populism on display during the electoral season had a distinct Bharatiya Janata Party stamp, its welfarist aspects have had “socialist" shades of the 1970s. This is an agenda dependent on a rapidly expanding State exchequer, which in turn would depend on a revival of the economy. The dilemma has been whether this is best done by the government itself, on Keynesian logic taken as a licence to spend far more than it earns, or by restraining its expenditure to make space for private investment and market forces, the favoured model of the liberalization era. In the five years of its first term, the Modi government ran a fairly tight show, though it let fiscal control slip badly in the last two, a trend that could have acted as a drag on growth. Or worse. Recall how the Manmohan Singh government’s second-term profligacy ended in high inflation and much grief. Would its successor, some wondered, go the same way? Going by this year’s Union budget, finance minister Nirmala Sitharaman’s first, the answer is no—at least on the face of it.

The government aims to contain its fiscal deficit in 2019-20 at 7.04 trillion, slated to equal 3.3% of gross domestic product (GDP), down from 3.4% in this year’s interim budget. Coupled with the proposal to raise debt in foreign currency from overseas to plug some of that gap—which would mean less money to be borrowed within India—the news had led the domestic bond market to heave a huge sigh of relief. Government bond yields have eased and prospects of easier credit for the rest have risen. The deficit for 2020-21 is projected at an even more reassuring 3% of GDP, as the government’s original “glide path" had promised. Whether or not it actually meets these targets, the Centre’s thrust is commendable.

How doable it is, however, remains unclear. Outlays on the farm sector, education, health and a variety of social sector schemes have been upped sharply. Total expenditure in 2019-20 is expected to go up 13.4% over 2018-19. This sounds reasonable. But gross tax revenues, which have been in a slump, are projected to rise robustly too, by 9.5% over last year. While import tariffs and levies on the wealthy have been raised, it would take an unlikely economic upswing to achieve that. Even if it happens, it won’t suffice. To rake in the sort of big money it needs, the government is counting on other receipts that are expected to take a huge leap over last year. If all goes well, the hawking of shares in public sector enterprises will account for about a fourth of this total. Could airwave spectrum sales and central bank reserves make up the rest? It seems a stretch. And, if the government resorts to off-budget funds to meet indirect expenses, a sleight of accountancy that cast its earlier fiscal claims in doubt, its glide path would fail to attain the credibility it so badly needs.

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