Inflation is on its way up (WPI at 4.75%), due to rise in prices of food and manufactured products and fuel price pressures. There is reason to expect it will reach the 5-6% range in coming months. The need to contain the demand-driven pressures from spiralling upwards is self-evident. RBI recently hiked the benchmark short-term rate by 25 basis points, to 5.25%. (And with interest rates in the US hardening, narrowing interest rate differentials will add more pressure). Juxtapose this with a fiscal performance defined by a 42% higher-than-last-years government borrowing programme and expenditure outpacing growth in tax revenues. We have a tough situation. The Centres fiscal consolidation process is slow, and as the FM says, it would be tough to cut the fiscal deficit below 4.3% and revenue deficit beyond 2.7% in 2005-06. The first half of this fiscal has already seen an overshooting of targets and the revenue deficit and gross fiscal deficit have touched 68.3% and 55.5% of BE, respectively.
The main constraints to cutting expenditures and raising revenues are political. The Left-bound UPA has been unable to deal with the acknowledged distortion of subsidies and in application of user charges in economic and social services. Divestment has been put on the back-burner. Perhaps, some minority shareholding sale may be finally allowed. But given that the latest status is discussions are to begin with the Left, it may not really happen fast enough, nor in adequate proportions. And CMP programmes; national rural employment guarantee, Bharat Nirman, et al, involve substantive outgoes. Meanwhile, any attempt at reform goes down the one-step-forward, two-steps-backward route. With domestic and global economic pressure points building up, the government needs to be firm with the Lefts demands. Given what India has managed despite such constraints, the opportunity cost is too high.