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The 33% rule to cover fiscal failure
Tue, 21 Feb Pre-Open

India is one of the few countries in the world grappling with twin deficit problem- dealing simultaneously with the issues of current account deficit and fiscal deficit, both capable of leading to a crisis. The performance slip of Indian Government in managing both was visible in the form of declining rupee and a growth rate less than what was estimated. Now that the fiscal year approaches an end, we can say that the Government got its moves wrong from the start. The over optimistic budget and economic growth targets set in the budget were doomed to fail. As compared to a growth target of 9% and target inflation rate of 7%, what we are witnessing is a growth rate of just over 7% and average inflation is expected to end up above 9%.

The planning has slipped on account of rising outflow on subsidies, lesser tax collections and failed disinvestment plans. As such, we are running a tangible risk of overshooting the fiscal deficit target initially set at 4.6% of GDP by 1%. However, the Government has come up with a quick fix solution to do some damage control and save its reputation. The finance ministry has come up with a rule that limits the spending by the Government departments to 33% (of the amount initially allocated) in the final quarter of FY12.

The different ministries have already exhausted an average of 63% of the annual allocation during the first none month versus 67% last year. Just two months back, the finance ministry took Parliament's approval for additional spending worth Rs 568 bn over and above the budgeted expenditure. At a time when non planned expenditure stands at a 76% of the budget estimate; we wonder how much relief and damage control the 33% rule will provide. All we can hope for is as the new budget session comes close, the concerned authorities will learn lessons and offer realistic budget estimates to begin with. And that will need to be backed by some serious action on the policy front for Indian economy to march ahead.

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