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UPA, a spend force

The finance minister has opted for growth over fiscal prudence. But will it be sustainable in the long run, asks NK Singh.

india Updated: Jul 16, 2009 21:41 IST

Kautilya is in fashion once again. While Finance Minister Pranab Mukherjee has quoted extensively from his sayings, he may have forgotten to quote an important one: “A king with depleted treasury will eat into the vitality of both citizens and country people.”

The minister has done a credible balancing act between conflicting objectives having opted for growth over fiscal fetish, large public outlays over incipient inflationary worries and putting resources to revive demand and consumption.

However, is this balancing act sustainable? While the fiscal deficit has been anticipated at 6.8 per cent, it is closer to 12-13 per cent when one takes into account the 4 per cent of the states and below-line under recoveries in the petroleum and oil sector.

These numbers are likely to go up if global oil and commodity prices firm up or food subsidies and other open-ended commitments turn out to be significant. The debt to GDP ratio may also be over 85 per cent. The burden on outstanding debt per capita for the current year is Rs 45,050 and by 2011-12 it will be Rs 67,375. That the government owes over Rs 67,000 for every Indian, rich or poor, can hardly be a source of comfort.

The revenue side of the budget was equally incomplete on crucial details. While it is encouraging that Mukherjee is committed to launching a new Goods and Service Tax (GST) by April 1, 2010, the preparatory work is far from complete. Considerable work, including constitutional changes for allowing states the power to impose service taxes and issues like inter-state appropriation entail enormous work and consensus among political parties in different states.

First, are the present policy initiatives of the government reacting to the right set of issues? In particular, are they distinguishing between the crisis symptoms and structural issues? Independent analysts like T.N. Srinivasan have suggested that attributing the current economic slowdown to exogenous global factors is somewhat misleading as the deceleration had started before the onset of the crisis.

The peak rate of growth of 9.7 per cent of GDP and 11.8 per cent for the manufacturing sector was reached in 2006-07, much before the global crisis. In every quarter since the last quarter of 2006-7, manufacturing growth has been declining, from a 12.5 per cent annual rate of growth to -1.4 per cent in the last quarter of 2008-09. GDP rates have also declined during the same period from 9.7 per cent to 5.8 per cent.

This suggests that the process of growth acceleration had run out of steam by 2006-07 because of domestic infrastructural and institutional constrains and, therefore, until these endemic factors are addressed, seeking the revival of the growth process through temporary stimulus may be halting and tardy, even counterproductive.

So what is the path forward?

First, we must rethink federalism. P.C. Mahalanobis was no reactionary and writing in 1950 he had envisaged a revisiting of the constitutional scheme of fiscal federalism given the new political, social and economic compulsions. This rethink needs to involve several key elements: giving states more fiscal room to incentivise and enable them to undertake varied stimuli targeted at local conditions and starting to equalise rather than cherrypick with central government transfers.

These inevitable differences are impeding important structural changes, including creating a more transparent framework and a competitive,employment-boosting labour policy, which can enable people looking for employment avenues outside agriculture and seek livelihood in labour-intensive manufacturing activity.

Second, correct self-inflicted tax distortions like not honouring contractual tax obligations on past investments in, say, oil exploration and pipelines.

Third, we must start to create credible, independent institutions of economic oversight to tackle the emerging challenges in a globalised world. We need to act on what the finance minister committed in the section on Initiatives in Public Expenditure Management to create an ‘Independent Evaluation Office’ for ongoing audit on public outlays.

Also, considering the huge borrowings requirement of the government and management of portfolio, there is a need to constitute an immediate and professionalised Public Debt Office, outside the Reserve Bank of India (RBI), to obviate from the conflict of interest. We should also consider restructuring the RBI itself by creating a separate unit — Banking Supervisory Authority — along the lines of Britain, Germany and other countries.

Fourth, we need to get down to detailed tactical plans for our fiscal and macro trajectories. We need a credible action plan for return to fiscal rectitude and signs of effective implementation would add to the government’s credibility. Administrative ministries should also come up with a detailed action plan with phased targets on what they intend to do in respect of the commitments made by them in the President’s speech and hinted at in the Budget.

This government has just come back with a new mandate from the people and in exchange for its electoral promises, it needs to perform. It must remember that the memory of creditors is always longer than that of debtors.

NK Singh is a Rajya Sabha MP and former Member, Planning Commission