Even as a deteriorating economic situation calls for significant fiscal measures, the Government of India finds itself hobbled by the election cycle, and by the absence of room for real manoeuverability. The first stimulus package, in the form of the supplementary budget approved by Parliament last October was the biggest step so far, pumping over Rs 230,000 crore into the economy, However, this largely comprised subsidies for fuel and fertiliser, much of it already spent in the preceding months, on the back of bank funding. It therefore was more a post facto squaring up, rather than a fresh stimulus. The subsequent packages have been far more limited, constrained by the inability of the government to effect direct tax changes and new expenditures in the absence of fresh parliamentary approval.
Since the next Budget will be presented no earlier than July, after the elections of April-May, there is speculation on whether there will be serious initiatives announced during the presentation of the vote-on-account or interim budget which, perhaps fittingly, an interim finance minister will present to Parliament next Monday. While nothing stops the government from announcing significant increases in expenditure on existing programmes, the reality of the situation is that these will be only enabling provisions. Once approved by Parliament, they will allow government departments to plan their spending; but as everyone knows, it takes these departments some months to crank up the machinery to start spending the money allocated. In any case, a full-fledged fiscal stimulus cannot rely on provisions that may or may not be endorsed by the next government and incorporated into its own Budget for the full year.
Although there is perhaps one precedent, it would be a departure from the usual discipline exercised by governments when presenting an interim Budget at the fag end of their terms, if tax changes are introduced next week. Technically, since the elections have not been formally announced, there is no bar on such decisions, but they would be seen as an impropriety. The question of course is whether the economic and business circumstances are such that the government feels justified in announcing tax changes as a means of providing a much-needed stimulus to the system. The ironic situation confronting the government, therefore, is that it is unable to take advantage of the fortuitous reversal of the oil price upswing, which has eased pressure on the fisc, to provide a fresh stimulus to the system.
It is worth noting that the room for counter-cyclical measures is limited because the government did not capitalise fully on the boom period till last year to set its fiscal house in order; targets stipulated in the fiscal responsibility law were postponed twice in the last five years. Finally, even as there is much debate on re-drawing the specifications of fiscal responsibility so as to give the government some flexibility in crisis situations, it must be pointed out that one aspect of fiscal responsibility, viz, transparency, cannot be abandoned. Even with only a couple of months to go in the current fiscal year, there is a lot of fuzziness about the true fiscal condition, resulting in a relatively wide forecast range for the fiscal deficit-GDP ratio. The first step to solving any problem is measuring its magnitude. Even if the deficit milestones are put into suspended animation, fiscal “responsibility” does not come to an end.
