T N Ninan: Fiscal risk

WEEKEND RUMINATIONS

One of the achievements of the Manmohan Singh government has been the fiscal correction that it has achieved, after initially "hitting the pause button" on reducing the deficit in its first year. The second year did see deficit reduction, and the Budget for this (third) year stays on track to eliminate the revenue deficit in three years, and bring the overall fiscal deficit down to 3 per cent of GDP, as envisaged in the Fiscal Responsibility and Budget Management Act. But now there are four reasons to worry about whether we will indeed stay on track, or veer off.

First, there is the somewhat alarming news that the deficit in the first two months of this year has soared to nearly half the figure planned for the year as a whole. That is most unusual, and the finance minister has quickly gone on record to state that the full year's numbers will be as budgeted. They well might, but greater disclosure about what happened in the first two months would help understand the picture better. The question is whether the government's big spending programmes are beginning to run away with the cash.

Then, there is the decision on Thursday to set up a new Pay Commission for government employees. This is certainly due, as the last pay revision was done nearly a decade ago. But the 1997 hike was predicated on the government reducing its overall staff strength by 3 per cent a year, or 30 per cent over the decade. Not only has this not happened, the staff strength has grown. If the government's annual wage bill now goes up by Rs 20,000 crore, as the parliamentary affairs minister mentioned, that adds 0.5 per cent of GDP to government expenditure.

The third negative development is the proposal to introduce social security measures for unorganised workers. This involves the overwhelming majority of the workforce, and also many complexities in administering any worthwhile scheme, so the whole thing runs the risk of becoming a giant boondoggle and a fiscal black hole. If a scheme is launched even as the spending on rural employment guarantee cranks up, the pressures on the expenditure side will be something that we have not seen for many years.

The final nail in the coffin of fiscal rectitude might have already come from the Planning Commission's draft "Approach" to the 11th Plan (which starts next April). The Plan postulates ambitious growth goals, but sees a shortfall in the required investment. So the Approach paper argues that either the goal of revenue deficit abolition should itself be abolished, or the over-all fiscal deficit reduction target pushed back by two years""to 2011. Having already "paused" such correction by a year, a further "pause" of two years will effectively kill the discipline required to bring the fisc under control.

Does the fiscal responsibility law provide protection against this? Not really, because all that the law requires of the government is that if it fails to meet the stipulated deficit targets, it must explain to Parliament the reasons for this, in writing! Doing that in boom times (when deficits usually shrink) would be embarrassing in an intellectual climate where the fiscal deficit target is seen as an important benchmark. But the Left does not believe in fiscal correction (which it damns as a World Bank-IMF conspiracy), and now the Planning Commission under the redoubtable Montek Singh Ahluwalia agrees with them (if not in the conspiracy theory). So the intellectual argument too could swing away from what the fiscal responsibility law mandates, and then it would be easy to break the barriers.

Thirteen years ago, when the then Prime Minister Narasimha Rao announced from the Red Fort a slew of new spending programmes on Independence Day, his finance minister (whose consent had not been taken) sat in his office and grumbled about how the government could not spend its way to prosperity. Dr Singh is now the Prime Minister. If he has not changed his views on government spending and on the deficit, what is he going to do?