The 1997-98 budget marks the beginning of the ninth plan. The United Front government is under tremendous pressure to bring down gross fiscal deficit to less than five per cent of gross domestic product. This is in keeping with the international battle against budget deficit.
President Bill Clinton, in his state-of-the-union speech on assuming charge for the second term, has vowed to slash budget deficit to bring out a balanced budget by the year 2002.
Budget deficit of less than three per cent is one of the conditions for members who seek to join the Euro currency by 1999. World Bank and International Monetary Fund (IMF) never tire of harping on checking budget deficit.
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The finance minister of a coalition may not find it easy to balance populist demands for a soft budget and hard decisions to contain deficit. It takes a stout heart and a strong political will to resist populist demands to curb expenditure and cast the tax net wider to raise resources. The 13-party coalition government lacks both.
The Left parties have already insisted on a soft 1997-98 budget that should be pro-poor and pro-worker without crippling various developmental schemes. This is a fiscal oxymoron.
The government would be hard put to carry out the mandate of low deficit and high growth without risking the mix-up of objectives and ending up achieving neither. If it curtails expenditure, it hurts development schemes and if it raises taxes to contain deficit, it may hurt sensitive sections and dampen investment initiatives.
A look at the expenditure pattern reveals the governments quandary. In 1996-97 budget estimates, total expenditure (TE) rose by 11.9 per cent to Rs 2,04,698 crore while non-plan expenditure (NPE) rose by Rs 15,693 crore and plan expenditure by Rs 6,001 crore. The increase is mainly due to internal debt including replacement of existing stock of debt by debt carrying higher rates of interest and small savings following higher collection etc.
Interest payment, defence and subsidies account for the major chunk of non-plan expenditure. In recent years, interest rates have gone up rather sharply. Interest deregulation may further add to this. The basic malady lies in the governments failure to keep a tab on non-plan expenditure and a growing tendency to borrow to finance it.
The rising internal debt is a sign of fiscal imprudence. The roots lie in the political pulls and pressures from various interest groups that clamour for more funds.
Interest payment estimated at Rs 60,000 crore accounts for 40 per cent of NPE and 29.3 per cent of TE in 1996-97. The share of interest was 27.9 per cent of NPE and 20.4 per cent of TE in 1990-91 but rose to 36.2 per cent of NPE and 25.3 per cent of TE in 1992-93.
Defence expenditure accounted for 18.5 per cent of NPE and 13.6 per cent of TE in 1996-97. Subsidies account for 10.9 per cent of NPE and 8 per cent of TE.
The Union government spent about 20.2 per cent of GDP ( at current prices) on plan and non-plan activities in 1991-92. There was a slight decline in the share to 19.5 per cent in 1992-93. The share was 18.6 per cent in 1995-96 (RE). Union government spending as a percentage of GDP has veered around 18 to 20 per cent in the period between 1991-92 and 1995-96.
The share of capital spending in total spending has come down from 26.1 in 1991-92 to 21.6 in 1995-96.
This means current expenditure is crowding out expenditure on capital assets that may affect the productivity of the economy in the long run.
Raja Chelliah observes, If government borrowing is used for relatively non-productive purposes, such as covering a shortfall in the current account of the Budget, increased government borrowing will mean displacement of capital formation in the economy leading to a lower rate of growth. (See his Towards Sustainable Growth : Essays in Fiscal and Financial Sector Reforms in India ,OUP)
Revised estimates of total expenditure for 1995-96 show a rise of Rs 10,852 crore, up 6.3 per cent over the budget estimate.
The rise in urea cost compelled a higher provision of subsidies. Higher provisions had to be made for civil and defence pensions etc as well. These factors contributed to a steep rise in public spending.
Each of these items has a political dimension. The real challenge lies in how the coalition government can tinker with these items to slash deficit in a situation of diverse pulls and pressures.