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Public finances: Getting a grip?

Feb 24, 2001

For the first time in years, the central government is likely to limit its fiscal deficit to projected levels. The containment of the deficit is largely due to better tax collections and a control on expenditure. However, it is important to point out that expenditure has been contained at the cost of plan expenditure rather than unproductive non-plan expenditure. And this does not augur well for a developing country like ours.

  • More on Central Government Revenues
  • More on Central Government Expenditure
  • For a more detailed analysis of the Indian Economy click here

    Why is developmental (or plan) expenditure important? Well, to sustain or even accelerate economic growth we need better infrastructure, for one. This requires investment. If the government were to spend a large chunk of its resources in interest payments, subsidies, admin and defence expenditure (which by the way in non developmental in nature) there would be little left for investment purposes (this is the situation now). Already the deterioration in the power supply position in a number of states is resulting in huge losses to the economy in terms of lost production. This lopsided allocation of resources needs to be altered. Indeed, the burden of a sub standard infrastructure is already hindering our economy.

    The Economic Survey, unfortunately, does not highlight this 'misallocation' of resources and its impact on the outlook for public finances. It does however highlight a number of other issues, which need to be urgently taken up by the Government:

    • Tax rates, which are already comparable with international countries, are beset with exemptions. These need to be checked.
    • Services sector remains largely untaxed. There is a need to broaden service taxes.
    • High customs tariffs in relation to East Asian countries.
    • Reduction in committed expenditure i.e. expenditure on interest, wages etc.
    • Reduction in primary balance, by sustaining nominal growth that is higher than nominal interest rates. This basically means that the government should not be borrowing to meet its debt servicing requirements. And if this situation exists, it is sustainable only when the nominal growth in output exceeds the cost of the money borrowed (i.e. the incremental output is enough to service the debt raised).
    • The Fiscal Responsibility & Budget Management Bill will go a long way in demonstrating our resolve in maintaining macro economic stability.

      The Economic Survey clearly highlights the issues that need to be taken up by the government at earliest. Whether any heed will be paid to these issues in the coming budget can at best be only speculated upon. But one thing is for certain. If India wants to jump to a higher growth trajectory, the government would need to 'bite the bullet'. Its time to recognise that lower deficits do not necessarily mean a better fiscal scenario. The means to achieve the end is equally important.

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