Expenditure control is a two-edged sword it may rein in the deficit but if it is at the cost of new investments, the solution will not stand the test of reason.

S. Balakrishnan

THE last few months have seen an unusual turn in the fortunes of the Union Government.

From the state of a perpetual borrower, it built up a cash balance of Rs 40,000 crore with the RBI. As a result, auctions of new Government of India securities have significantly slowed in recent times.

The buoyant economy has no doubt contributed to the happy situation. Direct and indirect tax collections are on a high, thanks to rising corporate profits and a consumer boom, especially in durable goods such as TVs, appliances, two-wheelers and cars. Real estate and property prices are rising.

There are signs of improving well-being everywhere and the official figures probably understate the actual growth rate of the economy.

That all this has happened without inflation trouble is thanks to the liberalisation and reforms process, now over a decade old. Meanwhile, public finances continued their steady deterioration. Quite often, the RBI itself was forced to accommodate the Government's gargantuan appetite for spending. Fortunately (if one could call it that), in course of time, banks came to the rescue, displaying unbridled enthusiasm for gilts in the falling interest rate environment - so much so that the central bank soon found itself short of securities to sell to the market.

A good time was had by all - the Government borrowed at lower and lower rates, the RBI was let off the monetisation hook and the banks made huge profits from the appreciation of their gilts portfolios.

The one dark cloud amidst the recovering and burgeoning economy was the fiscal deficit. Quite unexpectedly and contrary to all fears and predictions, the Government's financial recklessness went totally unpunished. It coincided with a global easing in inflation which did not leave India behind. Does the cash-flush Government's current account with the RBI mean there has been a turnaround in the fiscal situation as well? It does not seem likely. Reports suggest that Government spending has been considerably curbed and this accounts for its comfortable liquidity. Expenditure control is a two-edged sword it may rein in the deficit but if it is at the cost of new investments, the solution will not stand the test of reason and the country's and its people's needs.

It is, of course, for the policymakers and experts to tell. But fiscal responsibility and management mean more than window-dressing to keep the deficit within an arbitrary percentage for the sake of public consumption.

(This article was published in the Business Line print edition dated January 5, 2005)
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