FE Editorial In a fisc

The Financial Express
Posted: Saturday, Jul 26, 2008 at 2324 hrs IST
Updated: Saturday, Jul 26, 2008 at 2324 hrs IST

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: The Marxists at least did not make the UPA’s fiscal management difficult. Most of the expenditure commitments, including clasically populist ones like the farm loan waiver, would have been undertaken by the Congress anyway. And the off-Budget items that are pushing the fiscal deficit close to 9% of GDP are the result of subsidies that the UPA would not have compromised on. So, the one thing the Left’s departure should not make much difference to is fiscal deterioration. Still, optimists argue that without the Left, the government may be able to concentrate better on bringing some discipline back into the fisc. It’s not just credit rating agencies who are worried about India’s fiscal situation. RBI had made a very pertinent point some weeks ago that in inflationary situations, large deficits are not desirable. It had also obliquely drawn attention to the fact that official deficit numbers are not necessarily the best representation of reality.

The worry is that with at most nine months left for this government, and elections a concern, the time and willingness to rein in expenditure may be limited. Food, fertiliser and oil subsidies are above Budget projections. The sharp rise in food procurement means food subsidies will grow at a far higher rate than the projected 3.6% target for the year. Rising input costs and demand will ensure that growth of fertiliser subsidies is not contained at 1.6%. Estimates show that off-Budget spending through oil and fertiliser bonds would each amount to at least 1.5% of GDP. Other large outgoes that will arise this year are on account of the implementation of the pay panel report—it is unlikely the government can hold this off and make its employees unhappy before elections—and the financing of the loan write-off scheme. Neither has designated Budget allocation and each will push up expenditure by at least 0.4% of GDP in the current year. So, in nominal terms, the total size of the additional spending will be impressive—remember, each percentage point of GDP means a sum of around Rs 55,000 crore. It will be impossible to raise matching resources. Revenue accruals were good when the economic going was good. But the effect of a slowdown will be felt as final numbers are calculated. A small mercy, in terms of realistic accounting, is that the government factored in the impact of a slowdown—slower revenue growth was projected in Budget estimates. Disinvestment is one resource generator. Ideally, these reciepts should not be used for deficit management. But contemplating the ideal fiscal policy is a luxury the government doesn’t have.

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