'It might be better to temporarily jettison fiscal prudence'

India might be better off if it ignored the size of the fiscal deficit for a while and invested to reduce disparities because disparity levels have risen along with growth rates in the last decade, said a former economic advisor to the central government.

S Narayan, former economic advisor to the Government of India, on Monday identified the challenges India's economic administrators faced in a lecture titled 'Fiscal Prudence vs Public Expenditure.' The lecture was organised by the Palkhivala Foundation on the occasion of Nani Palkivala's birth anniversary.

Narayan put matters in context with a reference to India's economic performance. India's economic growth in 1990s was noteworthy. He expected the per capita income to reach $1,000 by 2010 (it's currently a little over $500), which would be a watershed.

Along with good economic growth in 90s, the disparity between the states and in income levels within states had widened.

The twin developments meant that "We are very much walking on the edge," concluded Narayan. In about three years, India would know which side of the edge it is on, he added.

In this scenario, Narayan felt that the central government's plans to invest large amounts in social infrastructure was the right course, even if it meant deterioration of fiscal deficit measures for a while.

Rigid adherence to fiscal prudence in the present scenario could increase the number of disenchanted youth, a development that would worsen social problems. The need to balance growth with equity appeared to have persuaded the current economic administrators to launch large spending programmes to improve social infrastructure.

Narayan traced the roots of the current situation to the start of economic liberalisation in the early 1990s. There was a sharp compression in social spending on the Centre's part and states had to fend for themselves in many areas.

A fallout was that only the better governed states were able to cope with the situation. Consequently, today when large spending in the area of social infrastructure was kicked off, the central government had assumed responsibility for areas that were meant primarily for state governments.

As an example of the expansion in the central government's range of activities is the funding in the area of primary education, said Narayan. The constitution needed to be suitably amended to allow for the central government's new role.