Column: Fiscal is the new fad

May 02 2013, 00:26 IST
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SummaryFinance minister P Chidambaram last Wednesday assured the investors that he has drawn red lines and the fiscal deficit will be below the 4.8% mark in 2013-14

Doomsday predictions for India over its fiscal deficit are necessarily speculative as we haven’t had any hard landing so far

Finance minister P Chidambaram last Wednesday assured the investors that he has drawn red lines and the fiscal deficit will be below the 4.8% mark in 2013-14. “A number of measures have been taken … We are determined to go back to the path of fiscal consolidation … We have laid out a new path and I have said these are red lines. This will be never, never breached,” he said. It is nice to see the finance minister committed to keep the fiscal deficit under control.

Currently, the developed world is reeling under a debt problem, and therefore there is an increased focus on the fiscal deficit figure. It has become fashionable in some way to focus on all the countries that have high deficits, and make all kinds of doomsday predictions. These days, popular discussions of deficits usually take it for granted that deficits are bad for the economy, and perhaps even immoral. Although this view can be defended, its justification is less obvious than one might think. Fiscal deficit wasn’t such a big villain a decade ago. The fad is like, when Lage Raho Munna Bhai became a hit, ‘Gandhigiri’ suddenly became the ‘done’ thing. Wrongdoers were gifted with roses and if somebody spit somewhere, many started objecting politely, if not cleaning it with a smiling face. All the ‘Gandhigiri’ was gone by the time the next movie Dhoom 2 got released and then young motorcyclists started racing on roads imagining themselves to be Hrithik Roshan. Fads can be quite short-lived.

Of course, this fad on focus on fiscal deficit is more serious and longer lasting. Most economic debates a decade ago would have argued that fiscal deficit has more benefits than defects. An analogy may be helpful in thinking about the desirability or otherwise of deficits.

Hypothetically, assume that you increase sales tax on cars and decrease it on motorcycles. This law does not benefit or harm the economy as a whole; it merely redistributes benefits among people. The direct effect is to benefit college-goers, young folks and the rural population and hurt the more well-to-do who buy cars. There are also likely to be other effects. For instance, the shift in sales tax from two-wheelers to four-wheeler personal vehicles may raise the demand for motorcycles and reduce the demand

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