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Combined fiscal deficit: The greater problem

Sep 5, 2000

Often in discussions, we stop at criticizing the way in which the central government has been utilizing its resources. We mention how the fiscal deficit to GDP (gross domestic product) ratio rose to 5.6% as against the targeted level of 4%. However, in all this, we miss out an increasing source of concern. The various state governments. FY91 was a crisis year for the economy. In that year, the combined gross fiscal deficit (GFD) of the central and state governments was put at 10%. Cut to FY00 and there is talk of buoyancy, reforms, foreign investment and a booming stock market. Amidst all this the fundamentals do not seem to have altered much. Infact, during FY00, the combined GFD of the government was put at 9.9%! The contribution of the state government to the deficit has risen dramatically. Infact, even in FY01, the GFD is projected to be at 8.6%.

The issue at the State level is similar to the situation faced by the government - rising expenditures even as revenues failed to keep pace. Worse still, developmental expenditure has taken a hit in an attempt to control the deficits. Indeed in FY01, developmental expenditure (both at the centre and states combined) is anticipated to grow at 2.3% against a projected growth of 12% in non-developmental expenditure.

The truth is that in fiscal terms we continue to face a grim situation. There is little effort on part of the government to reduce its size and as a result, deficits continue to surge. This has created other problems like higher interest rates, which stifle efficiency in the economy. However, hope can be derived from the fact that there is increasing buoyancy in the economy. The private sector is being promoted by improving the policy environment. Nevertheless a sustainable improvement in the fiscal scenario cannot be achieved until the governments (both central and state) reduce their size.

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