The key choice that the government has to make in the Budget is whether to allow the fiscal deficit to rule high through the new year, or whether to apply the brakes and impose some discipline. Planning Commission Deputy Chairman Montek Singh Ahluwalia has signalled that he is in favour of pushing for growth now and worrying about the deficit later, given that there is no immediate risk of general inflation, and since there is still some evidence of a shortage of private demand. But the Reserve Bank governor, D Subbarao, has been sending out different signals, arguing apparently that the time may have come to start tightening up on money supply and let interest rates rise. The latter may happen anyway, if the government follows a lax fiscal policy, because it will translate into higher government borrowings which will then cause money to be tight and raise interest rates. Businessmen probably don’t know what is the better choice; they would like the lower excise and service tax rates introduced at the height of the economic crisis last year to continue, but realise that if this means a bigger government borrowing programme, then interest rates that are already too high might climb still higher, and result in a counter-cyclical squeezing of economic activity that no one wants.
In the Interim Budget presented to Parliament earlier this year, the finance minister had posited 7 per cent GDP growth (which most people would consider acceptable when global GDP is still shrinking) and a fiscal deficit of 5.5 per cent. The true deficit, including the oil deficit at current prices, would be about 6.3 per cent, which compares with 7.8 per cent last year. Most people would reckon that a 6.3 per cent deficit is sufficient stimulus for the system, considering that last year’s original deficit target was 2.5 per cent. The problem is that the Interim Budget had assumed that some of last year’s tax cuts would be rolled back by the end of July, which the government seems disinclined to do just yet—if one is to go by Mr Ahluwalia’s promise that it will be a “popular” Budget. Add that to the numbers and the deficit could climb to the region of 7 per cent. Then, the government feels obliged to spend more on its signature socio-economic programmes as well as on infrastructure investment (in areas like roads). If more money is spent and things go badly (eg oil prices rise further), the deficit would head back to last year’s level of 7.8 per cent, which must be considered unacceptable.
On the positive side, the government could garner up to Rs 25,000 crore from 3G licence auctions, and perhaps as much or more from a disinvestment programme. This could bring the deficit back to the region of 6.3-6.5 per cent of GDP. Ideally, a 6 per cent limit is what the government should aim at, for that would present RBI with a borrowing programme that it could manage in the market without sending interest rates skyward. Overseas investors too might not look askance at a deficit that is capped at 6 per cent, especially if the finance minister lays out a road map for halving that number in the next two or three years, facilitated by a rollback of last year’s tax cuts.
