Fiscal Prudence Is Not A One Time Affair

Updated: Sep 22 2003, 05:30am hrs
The Economist, in its recent cover story, has compared the economic growth in China and India only to conclude that it was wrong to blame democracy in India for its snail-paced reforms. Not many in the country agree with that assessment. While it is debatable as to what slows down reforms in India or what enables China to open up so rapidly, supporters of the theory that democracy in India has a smothering impact on the pace of reforms have one more example to tout.

The Jayalalithaa-led AIADMK government in Tamil Nadu has come to a firm conclusion that the Lok Sabha elections are around the corner. This reading of the political situation has transformed the way the government has been operating. Repeated talk of fiscal prudence, financial challenges ahead, need for all sections of society to sacrifice for the sake of the state etc., has given way to claims of the state being out of the financial mess, and worse, populist largesse has begun to flow.

Some of the difficult but welcome decisions, such as withdrawal of free sarees and dhoties scheme, increase in the price of rice under the public distribution system and imposition of electricity tax taken by J Jayalalithaa, after she assumed office a couple of years ago, have been reversed recently. These decisions would cost the state exchequer a few hundred crores of rupees.

Also there have been attempts, both through the media and otherwise, to portray a picture of the state government getting out of the financial mess that it had inherited. This has surprised many and appears to be also linked with the forthcoming elections. This premature claim of success (in setting the states finances back on rails) is aimed at silencing the Opposition, which has begun to ask what the AIADMK government had been doing in the last two years to nurse the state back to health.

The delusion about the stat-es achievements on the fiscal front is indeed worrying. It is true that the state has managed to reign in the subsidies to an extent. It has saved over Rs 1,000 crore by withdrawing the Cauvery paddy procurement scheme. It has also cut the subsidy paid to the Tamil Nadu Ele-ctricity Board for supply of free power to farmers. The increase in bus fares has reduced the sta-te transport undertakings dep-endence on the government.

Tax collections have increased substantially with the imposition of multi-point taxation and better enforcement. It is being said that tax collections in 2002-03 were higher by Rs 1,300 crore compared to the previous year. The first few months of this fiscal are also said to be good in terms of revenue mobilisation.

These initiatives may at best enable the government to halt the runaway fiscal and revenue deficit. This years revenue deficit is expected to be Rs 3,933 crore (against last years revised estimate of Rs 5,917 crore) and the fiscal deficit is targeted at Rs 6,944 crore (Rs 8,105 crore last year).

But slackness on the part of the government on fiscal prudence would hinder the achievement of goals that it has set for itself by 2006-07, i.e., bringing down revenue deficit as a percentage of total revenue receipts to less than 5 per cent (it will be 17.35 per cent in 2003-04), reducing revenue deficit as a percentage of fiscal deficit to below 35 per cent (56.64 per cent), restricting fiscal deficit as a percentage of gros state domestic product to 2.5 per cent (4.07 per cent) and lower the share of interest payments in total revenue receipts to 15 per cent (20.06 per cent).

Sustained control over costs and more hard decisions would only help the government meet these lofty objectives. Downsi-zing of government is yet to take place, the wage and pension bill continues to bleed the exchequer, high cost debts remain to be restructured and divestment of state public sector undertakings is a non-starter. With such an unfinished agenda, claiming any degree of success on fiscal consolidation would only make the process more difficult. What the AIADMK government is risking is the understanding of the people to accept harsh measures for the sake of votes. Peoples appetite for reforms may go once they hear that the government is out of the woods. It should not forget that there is life after the Lok Sabha elections.