The managers of the fisc cannot be complacent about the expected improvement in fiscal ratios on account of improved economic growth this year. There is always a statistical gain to be had, in ratios where the gross domestic product figures in the denominator, from any rapid acceleration in economic growth. Since last years GDP growth was a mere 4.3 per cent and this year it is expected to be 7 per cent, most fiscal ratios will look better this year simply because of the steeper increase in the denominator. Expect, therefore, a lower fiscal deficit to GDP ratio. However, there is no room for complacency on the revenue and expenditure front because real fiscal empowerment will come only when the numerator also falls independently of the denominator. Moreover, the quality of the statistical improvement should also be growth-augmenting. That is, fiscal and revenue deficits must be reduced even as capital expenditure is stepped up. This can happen only when wasteful expenditures are reduced and, more importantly, adequate revenues are mobilised. The view that the shortfall on the disinvestment front can be made up by increased dividend distribution to government by the public sector does not take account of the fact that this would impair new investment in the public sector and weaken growth.
Moreover, any fiscal management plan for next year must take into account the possibility of reduced revenue from customs duty if the government is really serious of further reducing tariffs. The government must also take an informed and forward-looking view on value-added taxation in the light of available expert opinion that suggests that there could be revenue loss, at least initially, with a regime change to VAT. Finally, this years national income growth has come largely from the agricultural sector that does not contribute to direct taxes. If direct tax revenues have to increase, there has to be both reform in the tax administration, as suggested by the Kelkar Task Force, and an increase in the share of the organised industrial sector in GDP. Given the imponderables, it is premature for the finance ministry to pat itself on the back on fiscal management. Finally, even if the Centres fiscal numbers improve marginally this year, those of state governments have a long way to go before returning to acceptable levels. All in all, there is some distance to cover before the government can feel fiscally empowered to be able to sustain 7 per cent plus growth. The fiscal challenge remains, even if somewhat alleviated by recent income growth.