OUR VIEW|Fiscal fix
FISCAL correction has taken a pause, the finance minister said in his budget, assuring that normal services would be resumed soon. Given P. Chidambaram?s hugely difficult agenda, he may have had little choice.
FISCAL correction has taken a pause, the finance minister said in his budget, assuring that normal services would be resumed soon. Given P. Chidambaram’s hugely difficult agenda, he may have had little choice. But as the minister — were he allowed a free reformist hand — would himself say, there are worries. He pointed out that the budgeted revenue deficit for 2005-06, 2.7 per cent of the GDP, is the same as the revised estimate for 2004-05. By the fiscal responsibility act, revenue deficit target should have been 0.5 per cent lower for 2005-06. The fiscal deficit, at 4.3 per cent of the GDP for 2005-06, should have been 0.3 per cent, not 0.2 per cent, lower from the 2004-05 revised estimate, 4.5 per cent of the GDP.
It is possible to argue that given the good macroeconomic situation — inflation is manageable, balance of payments comfortable, plenty of credit for government borrowings and private sector needs — and given political/economic spending commitments, violating the spirit of the fiscal act — the letter of it was taken care of by an amendment postponing the deficit reduction schedule — may not have been such a bad idea. Against this one has to set the principle that fiscal policy should be counter-cyclical — keep something in hand in good times for use when the economy slumps.
Actually, even in these good times, the government’s fiscal situation would have looked worse had the budget not given states the responsibility of raising Rs 29,000 crore of its total borrowing programme for 2005-06. If this figure is added back to the Centre’s borrowing quantum, Rs 151,144 crore, it makes the fiscal deficit look considerably unhealthy. There’s also the question of whether states, fiscally worse off than the Centre, can or should borrow this amount. Or if they do, whether there’ll be upward pressure on interest. This, because given states’ existing indebtedness, more loans will perhaps only come at higher rates. Of course, there’s the perennial post-budget question: will the budget’s assumptions on tax revenue growth be met. The trend rate, over the last ten years, of tax revenue growth is 16 to 17 per cent. The budget bets on what looks like an optimistic 23 per cent net (of devolution to states) tax revenue growth. The budget assumption in 2004-05 on tax receipts fell short of actuals. If history doesn’t repeat itself, it would be a pleasant surprise. If it does, the government will have no time to pause on fiscal correction.
