How to achieve fiscal prudence?

Fri, 7 Oct Pre-Open

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Fiscal prudence has always been a key agenda of the budget announcement speeches that happen every year. During the recent annual budget, government had laid out a deficit target of 4.6% (as a percentage of GDP) for the current fiscal. However, finance minister Pranab Mukherjee, recently voiced his opinion that it would be difficult to meet the envisioned target for the year. While revenue is suffering due to falling tax receipts, the expenditure has been on a steady rise due to increasing investments in infrastructure.

Fall in tax revenue due to slowing economic growth and redemption from the state run deposit plans will force the government to increase market borrowings. It may be noted that savings in state run deposit plans are used to fund public expenditure. And withdrawal of these savings typically results in liquidity crunch. As a result, the government is planning to sell more debt to raise money. However, increase in market borrowings can threaten the nation's debt rating and may also crowd out private investments. Hence, the government has to be really vigilant here.

As far as the widening deficit issue is concerned, we believe that subsidies doled out by the government have been a prime culprit here. Priority sectors like oil and fertilizers are given huge subsidies which effectively creates a hole in the pockets of the government. However, the ministry is taking calibrated steps to deregulate these sectors. But considering the vote bank politics involved here, we believe it would take long before we see free market pricing in these subsidized sectors. And once that concludes, it would become comparatively easier for the government to manage its deficit targets.

Apart from eliminating subsidies, increasing tax rates is another tool at the government's disposal. However, increasing tax rates at a time when the common man is reeling under the pressure of inflation would not be a populist measure. Cutting expenditure is another area which can be explored. However, considering that our expenditure is predominantly on public goods like infrastructure, unlike on social security measures as in the west, the area for reduction is miniscule.

Thus, we believe that there is very little room for improvement on both revenue and expenditure front as far as government finances is concerned. Unless we gain consensus in bringing an end to the subsidy era, the fiscal woes will continue to linger.