As the Union finance ministry settles down to prepare its annual financial statement and the Budget for 2011-12, the challenge of fiscal consolidation faces the Union government starkly. The reassurance provided by the Union finance minister and his officials on their commitment to stick to the fiscal projections of the 2010-11 Budget is welcome. However, as they well know, this has been made possible both on account of higher-than-forecast national income growth and the higher-than-expected windfall gains from disinvestment and the sale of 3G telecom spectrum. As the Mid Year Analysis of the economy provided by the ministry of finance candidly states, higher-than-expected non-tax revenues have played a critical role in the government cushioning increased expenditure this year. Going forward, the document clearly recognises the nature of the fiscal challenge at hand. It remains to be seen if the government will be able to eliminate the revenue deficit altogether in the near future or not. Equally important, will the government be able to get a grip on domestic debt? Quite obviously, the fiscal adjustment strategy for 2011-12 will have to be based on expectations of sustaining high growth and generating higher revenues. An important means to this end would be tax reform which seems to be adrift. Hopes of getting movement forward on direct and indirect tax reforms remain just that. If anything, there has been a rollback in the process of tax reform in the past year and no evidence of much political stamina in the government to give a push on this front.
There are at least two important reasons why fiscal stabilisation and adjustment must constitute the fulcrum of the budgetary strategy for 2011-12. The first and foremost is inflation management. It is now clear that resurgent inflationary pressures cannot be fought with monetary policy alone. While there is still some headroom available for interest rates to be raised, and while it is true that global commodity price inflation is contributing in part to inflation in India, the fact also is that both at the global level and in India, liberal fiscal policies have aggravated inflationary pressures. Fiscal populism may be popular with the masses in the short term, but it is they who are hurt the most by it in the medium term if inflation rises. Increasing subsidies to appease political constituencies hurt by inflation is like robbing the aam admi with one hand and gifting with another!
A second reason why Budget 2011 must focus on fiscal adjustment and stabilisation is that this year growth is forecast to be above average. It is on the upswing that fiscal stabilisation is best made. Grandmothers call it “saving for a rainy day”! Given uncertain global portents, with attendant implications for the business cycle, and the certainty of the domestic political calendar, with attendant implications for the political spending cycle, it is best that the fiscal house is cleaned up when the going is good. The Mid Year Analysis was right to identify fiscal consolidation as the first of the five challenges facing the government. No better time to get a grip on it than now.
