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A trial balloon has been floated recently that India must go in for more public spending, since the private sector is hamstrung by stretched balance sheets. The argument runs that it is okay to breach fiscal deficit targets provided the spending is for useful investment. Advocates of this line argue that the deficit target is not written in stone. It is further said that rating agencies are unlikely to take a dim view of any such breach, and even if they do, who cares, since their own credibility is questionable.
These arguments are specious. First, commitments given by the finance minister are sacrosanct. He must keep his word, or who will ever trust him or the government? It was only in order to bring some fiscal discipline that the FRBM Act was introduced. That was given the go-by in 2008. But there is no excuse now and finance ministers must return to the path of rectitude, if they are to be taken seriously. Second, whatever happened to the concept of less government and controlling expenditure? We know from experience that only a fraction of public investment ever achieves the intended goal. Take two government dominated sectors where investment is required — railways and defence. The money goes mostly towards administration expenses, not capital investment. More public investment at this time will only increase department budgets, making it virtually impossible to ever think of downsizing them in future.
As for the credibility of rating agencies, while there can be a hundred opinions on the subject, they remain essential to well running financial markets as much as the police is to the maintenance of law and order. Rating agencies and their opinions matter to markets and investors, notwithstanding occasional missteps. But to imagine that they will look on benignly if the deficit target is breached by the government or that their downgrades will not affect us, is to harbour a dangerous delusion. The government must honour its commitment, keep deficits low and get a rating upgrade quickly. The rest will follow.
NS Vageesh, Associate Editor
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