The Hindu Business Line : Fiscal deficit rumblers ahead

The logic of the Finance Minister that tax cuts will promote greater consumption and yield higher revenues besides promoting growth and income will hold good only if the Government devises some measures to balance the effect. Some effort has, for instance, to be made to whittle the burgeoning subsidies which might gobble up Rs 49,907 crore as budgeted in the 2003-04 fiscal.

IF THE New Year heralded the blossoming of friendship between India and Pakistan with the triumphal visit of the Prime Minister, Mr Atal Bihari Vajpayee, to Islamabad to take part in meeting of the South Asian Association of Regional Co-operation, the subsequent days saw a string of positive tidings.

The 8.4 per cent GDP growth in the second quarter of this fiscal, as announced by the CSO on January 1, was followed by the Reserve Bank of India Governor, Dr Y. V. Reddy's remarks at the annual general meeting of FICCI on January 7 that "unless there are unforeseen circumstances, the overall GDP growth for the year 2003-04 as a whole, which was estimated at 6 per cent at the beginning of the year and 6.5-7 per cent in November is, on latest assessment, likely to be higher and around 7 per cent with a continued upward bias."

Dr Reddy's cautious assessment, laced with a rider of "continued upward bias" for GDP growth this fiscal was promptly spurned by none other than the reticent Finance Minister, Mr Jaswant Singh, to whom the RBI assessment sounded "conservative".

For the Finance Minister, who scripted the "India Shining" campaign launched on the eve of the five State Assembly elections to highlight the sound macro-economic fundamentals, the bountiful monsoon, the bulging foreign exchange reserves, the moderate inflation rate and the strong external performance, any doubts on the boom in the economy from any quarter isanathema.

His January 8 bonanza to Indian industry and the middle-class, the traditional vote-bank of the Bharatiya Janata Party, followed by additional spurs to farmers and infrastructure projects, overseas investment and old-age pensioners was in the making for 45 days, as conceded by Mr Jaswant Singh in his post-Mini-Budget press briefing in the capital.

Though the propriety of providing sops running into crores of rupees, particularly when, by all indications, the NDA coalition is preparing to call for early elections was questioned by people inured to the Budget process and parliamentary sanctity attached to money matters, Mr Jaswant Singh simply quipped: "When is economics entirely free of politics? The Budget is governed by policy which is essentially political." The Finance Minister escaped serious castigation because any overt opposition to the sops is fraught with risks for political parties on poll-eve..

Obviously, the Finance Minister thought that the moment must be seized as "the economy is on a roll" and as the pervasive feel-good factor ought to be given a boost by making goods available at affordable price for consumption to feed on so that there is a rebound in demand.

The intentions are laudable, but if the history of tax-cuts being passed on to consumers is any guide, the reduction in duties for specific products may not get translated into price declines.

Again, the spend-your-way to growth theory has its own risks, particularly at a time when consumer loans are freely available from financial institutions, in general, and banks, in particular. The lending binge could mean further trouble for banks, already saddled with non-performing assets.

According to a written answer to the Rajya Sabha by the Minister of State for Finance, Mr Anandrao V. Adsul, 79 banks had written off Rs 11,619.70 crore in 2002-03, while as many banks had done so to the tune of Rs 8711.04 crore in 2001-02 with 10 banks writing off the maximum number of loans. Leaving aside the concern to the financial system, the selective cuts in duties have triggered demands for similar sops from other manufacturers.

Apart from coping with similar demands for tax exemptions and cuts, the Government needs to watch out for any spurt in import of sensitive items.

While the spurt in non-oil imports to 26.5 per cent during April to November 2003 is welcome as it could signal arevival of domestic economy, the aggregate import of 300 sensitive tariff lines for the first half of this fiscal by 52 per cent is a matter of some concern. No doubt, these items barely constitute six per cent of the total imports but the growth has been happening in such major consumer items such as palm oil, edible oil, cotton, vegetables, automobile, rubber and small-scale industrial products.

This portends trouble for units manufacturing these products as some of these non-agricultural goods (at a reduced 20 per cent peak Customs duty) would cut into their market share.

If the benign headline inflation turns mildly malignant, as it is beginning to, the industry would lose the advantage it has got from cuts in duty; inflation is worst for consumers as it is the severest form of taxation particularly for the large numbers of people whose income is not indexed to it.

Already crude oil prices have firmed up, necessitating upward revision in energy prices and with the rally in commodity prices putting an end to deflationary fears in developed countries, the price of imported products, particularly when the rupee is hardening against the dollar, would get reflected in domestic industries' imported inputs, stoking inflationary fires and adding to the high-cost economy.

From the expenditure side, the Government might hit the fiscal deficit target because of the spectacular GDP growth that is likely to exceed even the conservative estimate of 7 per cent. But that is small comfort considering that no genuine effort has been made to whittle down the burgeoning subsidies which together might gobble up Rs 49,907 crore as budgeted in the 2003-04 fiscal.

With the Government proposing interest subsidy for the agriculture infrastructure and credit fund, the infrastructure and marketing fund and the small and medium industry fund, entailing a net outgo of Rs 2,200 crore in a full year and other cuts in the sops-spree the Finance Minister unveiled a few days ago, the impact on the fiscal deficit can well be imagined. This might even compel the authorities to compress capital investment on development projects as has happened in the past.

Moreover, if poll dates are brought forward, public work programmes would be the casualty, as the Government, reduced to caretaker status, would not want to take decisions that might draw censure if another coalition comes to power.

So, with the prospect of early elections and the series of pre-poll announcements, the the Government should not lose sight of the macro picture and dismiss the genuine concern over fiscal deficit.