Montek Singh Ahluwalia, deputy chairman of the Planning Commission, has said in an unusually frank television interview that the central fiscal deficit this year could end up being as high as 5.5 per cent of GDP, significantly higher than the Budget figure of 4.6 per cent and also much higher than the level in the last financial year. Adjusting for changes in the definition of the deficit, made in or about 2003, the deficit level today is higher than in the first year of economic reform, back in 1991-92 (about six per cent). Forget fiscal correction, there has been fiscal deterioration over the past 20 years — in part because the Budget now has a significantly smaller investment component; far more money goes in what is called “revenue” rather than “capital” expenditure, reflecting growing subsidies and new entitlement programmes. This is a grim if not depressing message, and testifies to the futility of laws on fiscal responsibility when there is no political commitment to carrying out fiscal correction.
The Manmohan Singh government should take a leaf out of Jayalalithaa’s book. The Tamil Nadu chief minister last week announced a 35 per cent increase in the price of milk, hikes in bus fares of between 16 per cent and 50 per cent, and forthcoming hikes in power tariffs. Her hand was forced by the fact that the state’s debt has crossed Rs 1,00,000 crore, and the treasury is empty. The various state transport corporations reportedly lost a staggering Rs 6,150 crore last year, milk collection by the state agency has dropped sharply because prices are unremunerative, and the state electricity board has reached the point where it can get no additional bank credit and may, therefore, not be able to supply power. The irony is that the same Jayalalithaa swept into office a few months ago on the strength of her promises of various freebies to voters. To her credit, she has assessed the state’s financial position quickly and taken steps that are bound to be unpopular but perhaps unavoidable. This is a repeat of what she did when she came to office a decade ago, only for many of the tough decisions to be reversed when she faced mid-term electoral setbacks.
The Centre’s fiscal situation is better, but nowhere near what it should be. The last Finance Commission postulated a fairly sharp drop in government debt in relation to GDP, as a consequence of shrinking deficits. That optimistic scenario now looks like a pipe dream. Indeed, a government that is on the back foot will be tempted to announce ever more ambitious entitlement programmes, the most prominent of which is the food security programme. At a time when tax revenues are taking a hit because of the economic slowdown, this building up of entitlement expenditure that is either not sensitive to business cycles or perhaps even counter-cyclical (expenditure shoots up when there is an economic downturn) will mean that fiscal correction becomes ever more difficult. There is only one way to go, and that is to copy Jayalalithaa’s actions.
