The Hindu Business Line : Fiscal distress

There was a time when the UPA government could claim a definite movement towards fiscal discipline as a major achievement. When the finance minister spoke this February of progress in narrowing the revenue and fiscal deficits within prudential limits he meant that admirable journey toward sound financial management was made all the more remarkable by the government not sacrificing any of its social objectives. That journey may as well be aborted as evidence of extravagant spending and unbridled commitments mounts.

For the period April-May central government expenditure rose 20 per cent compared with a decline of 1.3 per cent in the same period last fiscal. Some of that spending was on Plan projects but a fourth went towards interest payments, by far the biggest expenditure. While an annual increase of some 5 per cent in total expenditure has been estimated the government may end its term of office spending far more than budgeted with an unprecedented impact on the fiscal deficit. This year the Sixth Pay Commission payouts will kick in with Rs. 15,564 crore each for the first two years. The debt waiver of Rs.71,680 crore brave as it is will take its toll on the deficit. But expenses on existing heads are ballooning; the fertiliser subsidy budgeted at Rs. 30,000 crore does not seem enough to the Fertiliser ministry that wants it hiked to Rs. 90,000 crore. Similarly, an increase in the targeted food subsidy of Rs. 32,667 crore cannot be discounted as food grain procurement has risen this fiscal; petroleum subsidies must surely overshoot the budget given the incessant hikes in oil prices. All in all, the impact on the fiscal deficit will not be pleasant and it is debatable if the government will be able to adhere to its target of a deficit of 2.5 per cent of GDP. The RBI’s first quarter review of 2008-09 attributes the higher fiscal deficit to a “sharp rise in plan expenditure” and a “moderation” in non plan expenditures. The picture will alter over the next two quarters, which is why the CMIE estimates the current year’s deficit at 5.3 per cent if the hitherto excluded petroleum subsidies are factored in.

So far the economy has been the shining knight for the government with an increase in revenue collections of 36 per cent despite slipping industrial growth. Such robust collections may have emboldened the government into the excise and customs duties cuts on petroleum to temper the increase in product prices this May. Officials feel confident the next nine months are enough for the government to push through more reform; they should start with prudent fiscal management, once again.

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