Fiscal strain

The finance minister placed before Parliament on Friday his ministry's review of the state of public finances at the end of the first quarter. When the numbers were published a few weeks ago, they revealed a rather worrying picture. The quarter's deficit was over half the budgeted deficit for the whole year. While revenue receipts had increased moderately, they clearly did not show the same buoyancy as overall economic activity. More so, however, the deficit had surged because expenditures had risen rather rapidly over the levels of the first quarter of last year. The finance minister has interpreted this as evidence of increasing efficiency, but has been concerned enough by the numbers to impose a blanket reduction of 5 per cent on budgets for the rest of the year. The report to Parliament last week reiterates the minister's general air of confidence that the first quarter is no reflection of the overall state of government finances and that the ministry should have no trouble meeting its targets for the full year.

Part of this confidence stems from the relatively positive macroeconomic environment in which the country finds itself. While the report does acknowledge that high oil prices and rising interest rates are threats to macroeconomic stability and persistent high growth, it does not see any imminent signs of the adverse impact of these factors. It therefore expects the current momentum to continue for the rest of the year, providing it enough room to manoeuvre as far as deficit control is concerned. On the expenditure side, the report goes beyond the general reassurances offered by Mr Chidambaram earlier this month and refers specifically to advance transfers made on account of the rural employment guarantee programme and other social sector schemes. However, he also admits to the fact that subsidy payments during the quarter were over 70 per cent higher than in the first quarter of last year, partially reflecting the heavy toll that high oil prices are taking amidst the government's reluctance to pass on the increased costs to consumers.

Although the report emphasises the ministry's determination to keep the deficit within bounds, there are legitimate concerns about its ability to do so. On the revenue front, while direct taxes are quite responsive to the surging profitability of the corporate sector and rising personal incomes, growth in indirect tax revenues remains somewhat subdued in an environment of high manufacturing growth, which is the main base for these taxes. The twin problems of exemption and evasion have obviously not been solved to a satisfactory degree. On the expenditure front, given the widespread scepticism about the efficiency of delivery of public services, paying out large amounts to state governments or other implementing agencies makes it even more difficult to hold them to account. Worse, the political gridlock on all forms of subsidies makes fiscal management extremely vulnerable to the oil price scenario, which most people have now accepted as a permanent state of affairs. With so many constraints on the government, its ability to keep the fiscal situation under control must be open to doubt.