India is shining… but deficit, inflation can spoil the party

“The fiscal situation still remains a cause for concern,” says RBI in its Report on Currency and Finance. “The tax-GDP in the economy continues to be low. As the revenue deficit is high, the burden of fiscal correction falls on public investment,” says the report. It is not a happy situation with the public sector dis-savings deteriorating, owing to a rise in dis-savings of government administration. The silver lining in the savings story is the increase in household financial savings — mainly driven by deposits, provident fund and pension funds — which have been instrumental in bridging the gap created by public sector dis-savings. “Hence, the high fiscal deficit has not put pressure on interest rates or for that matter on the monetary policy and the current account balance,” the report says.

Here, it may be noted that the rise in rate of savings in India has been lower than other east Asian countries. While India’s private savings are comparable with that in East Asia, it is the public sector savings that are now exceedingly low and even negative.

In the fiscal scenario, all the deficit indicators are projected to be lower during 2003-04 in anticipation of higher growth. But in absolute terms, “the major deficit indicators are expected to increase from the levels in the revised estimates for 2002-03 due to relatively higher growth in expenditure,” the report says.

On the inflation front, there has been some pressure in recent weeks. Increases in prices of domestic mineral oil, electricity, fruits, oilseeds and textiles pushed inflation up to 6.1 per cent by January 3, 2004. But in course of the high GDP growth, what is noteworthy is that the buoyancy is spread across sectors.