The deficit reduction performance has been erratic, and the quality of fiscal consolidation suspect.
The Union government’s fiscal consolidation story in the last 20 years reveals a disconcerting trend. One, in spite of the commitment on fiscal consolidation made by successive governments since the P V Narasimha Rao-led regime launched economic reforms in 1991, the overall performance with regard to deficit reduction during the last two decades was erratic and unflattering. Two, though the Centre’s fiscal deficit in 2010-11 was lower than what it was 20 years ago in 1991-92, the quality of fiscal consolidation remained suspect.
Manmohan Singh took charge of the finance ministry in 1991-92 and took a series of measures slashing the fiscal deficit to 5.9 per cent of gross domestic product or GDP. This was the steepest cut in one year during the last two decades, representing a 2.5 percentage point decline over 8.4 per cent of GDP in 1990-91. The fiscal deficit declined in the subsequent four years and by the time Singh demitted office as the finance minister in May 1996, the fiscal deficit for 1995-96 had come down to 4.1 per cent of GDP.
The performance in the following seven years was patchy — Palaniappan Chidambaram’s two years as finance minister in 1996-97 and 1997-98 saw the fiscal deficit rule at 4 per cent and 4.7 per cent, respectively. Chidambaram’s successor, Yashwant Sinha, did worse; he presided over North Block for the next five years with the fiscal deficit going up every year until 2001-02, when the gap widened to an uncomfortable level of 6.2 per cent. The following year under Sinha, the deficit came down marginally to 5.9 per cent of GDP.
The Jaswant Singh-Chidambaram era saw handsome recovery, at least in the initial years. Singh brought the deficit down to 4.5 per cent of GDP in 2003-04 and Chidambaram in the next four years brought it down, at first stabilising it at four per cent in 2004-05 and 2005-06 and then reducing it further to 3.5 per cent in 2006-07 and 2.7 per cent in 2007-08. That marked the lowest fiscal deficit level achieved by any government during the post-reforms era.
The next year, however, coincided with the Great Recession that dealt a big blow to the global financial system, which also had its inevitable impact on the Indian economy. With fiscal stimulus measures in full flow, the Centre’s deficit widened to 6 per cent of GDP in 2008-09. Like in Manmohan Singh’s first year as finance minister, the cut was the steepest, in Chidambaram’s last year as finance minister, the rise of 3.3 percentage points in one year was the highest in the post-reforms era.
Since then Pranab Mukherjee has been on the job. He has managed to bring about some reduction in the deficit to 4.7 per cent of GDP in 2010-11. However, if you compare the deficit level of 5.9 per cent in the first year of reforms and the deficit level of 4.7 per cent in the twentieth year of reforms, critics are likely to wonder about the real progress achieved in fiscal consolidation. A lot was achieved in the middle years, but the government squandered away much of those gains in the last few years.
The quality of fiscal consolidation achieved in these years also leaves much to be desired. For instance, almost all finance ministers during these 20 years have failed to achieve either any significant growth in revenue or a significant contraction in expenditure on a sustained basis. Gross tax revenue in 1991-92 was 10.29 per cent of GDP and this remained at 9.99 per cent of GDP in 2010-11. However, on the total expenditure front, the figures show a decline from 17.02 per cent to 15.44 per cent of GDP in the same 20-year period. In an ideal scenario, this decline should have been more.
Worse, the government’s capital expenditure fell steeply, from 4.45 per cent in 1991-92 to 2.07 per cent of GDP in 2010-11. In other words, revenue expenditure (or the government’s spend that largely meets consumption needs without creating any assets) in this period has gone up from 12.57 per cent to 13.37 per cent of GDP. Similarly, the government’s expenditure on subsidies has gone up from 1.87 per cent to 2.08 per cent of GDP in this period.
The only redeeming feature perhaps is in the share of direct and indirect taxes in the government’s total tax revenue. The contribution of direct taxes to the central exchequer has gone up significantly from 2.32 per cent in 1991-92 to 5.57 per cent of GDP in 2010-11, just as indirect taxes’ share in revenue has gone down from 7.95 per cent to 4.42 per cent of GDP in this period. That, however, may not be much of a consolation for the government.
