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How about some discipline?

That the government is trying to stick to fiscal discipline after legislating the FRBM Act in 2003 is ironic.

india Updated: Oct 02, 2006 01:11 IST

That ugly monster is rearing its head again. The country’s fiscal deficit faces the prospect of going out of control, according to a note moved by Finance Minister P Chidambaram to the Cabinet. Both Plan expenditure, which refers to development spending, and non-Plan heads, which cover less productive items such as subsidies and salaries of government employees, are mounting. In the first four months of the current fiscal year alone, the fiscal deficit has crossed Rs 90,678 crore, representing 61 per cent of the total forecast for the year. Some good news has come in the form of a healthy 8.9 per cent first-quarter GDP growth. This has raised hopes of better tax buoyancy in the remaining months of the year to shore up the government, which is aiming for the fiscal deficit to be 3.8 per cent of the GDP for the full year. The government has admitted that without corrective measures, the targeted reduction in revenue deficit of 2.1 per cent, compared with 2.6 per cent last year, may not be possible.

That the government is trying to stick to fiscal discipline after legislating the FRBM Act in 2003 is ironic. The point is, laws are a poor substitute for discipline. Government hand-outs in the form of subsidies, unseemly tax incentives and exemptions dog India’s post-reforms economy. A glimmer of realism comes in Manmohan Singh’s remarks that the jury was still out on whether incentive-based policies really promote industrial growth. Though he did not mention SEZs, he needs to take a call soon on what special tax breaks and controversially-acquired and sold farmland mean for fiscal and political prudence.

On oil prices, the government has been mired in a policy of drift. Despite a fall of about $ 15 from the year’s highs, global crude prices are still ruling at around $ 62 a barrel, while the government continues to benchmark retail prices against an effective price of $ 52. That amounts to a subsidy of $ 11 on every barrel of oil, though its mechanism may be couched in special bonds for public sector oil companies. But an economic management culture that leans on hand-outs can erode India’s drive to become the next China.