100 days,1 question

Food security,rural health cover and extension of the job guarantee scheme are reported to top the prime ministers 100-day agenda. There are indications that decisions about financial sector reform and disinvestment will be taken later. The expectation is the government will spend more on infrastructure,thereby spurring domestic demand and providing a fiscal stimulus. If the reform agenda consists of improving the efficiency of government welfare schemes,it is welcome. If it is merely going to pump more water into leaky pipes,the government could face a big problem in coming years.

It is important to remember that tax revenue growth is likely to be much lower this year,due to lower GDP growth and lower trade. Evidence of this trend has already started coming in. With lower growth in tax revenue,if expenditure sees a sudden rise,it can give rise to a loss of confidence in the government,higher interest rates and an adverse impact on the investment climate. The last five years have had high GDP growth and rising tax revenue growth. This will not continue and an expansion in government expenditure at a time of high fiscal deficit and debt is a dangerous strategy. Spending more on welfare schemes,food subsidy,infrastructure and health can all be done but can be done sustainably only if GDP is growing robustly and the fiscal health of the government is good. One option before the government is to spur private investment mainly through an increase in confidence about growth prospects about the Indian economy. This can be done by a variety of economic reforms that include: fiscal,financial and monetary institution building,doing away with bad taxes like the securities transaction tax and the fringe benefit tax introduced in the last five years,moving forward on making India an integrated market,removing restrictions on domestic trade of agricultural goods,liberalising higher education,and selling public sector assets to repay public debt.

Most of these reform items have been on the agenda for a long time. The task now would be to start implementing them as a matter of priority. These would not only cost the exchequer nothing,by keeping private investment and thus GDP growth high,they would help in bringing in the tax revenue the government needs to spend on its welfare programmes. While politically it might make sense to first announce large spending on social welfare programmes and then to find the resources for them,if all that is done is the former,it has a huge risk of pushing the country into a crisis.