Fiscal matters

There is good news for the Union government on the state of its finances. According to the latest statistics released on September 30,the governments fiscal deficit for the first five months of the financial year 2010-11 April-August fell by around 17 per cent compared to the same time period last year. There are two explanations for this improvement in the deficit. For one,the government earned a bounty of Rs 1.06 lakh crore from the auctions for 3G spectrum and broadband wireless access. This addition to the governments non-tax revenues turned out to be much higher than the Rs 35,000 crore that was estimated in the last budget. A second,unrelated boost comes from the buoyancy of the governments tax revenues in the first five months of this fiscal year. Net tax collections of the government have grown by 29.6 per cent on a year-on-year basis between April and August. This is a reflection of the sharp turnaround in the overall growth rate of the economy. In fairness to the government,at least some of the increase in the deficit to over 5 per cent was because of declining revenues and increased stimulus spending during the crisis. That has now clearly reversed.

The most direct impact of an improvement in government finances is on government borrowing: market borrowing by the government has reduced significantly by almost half and that has freed resources for use by the private sector. Reduced government borrowing also helps prevent upward pressure on interest rates,something that is without doubt good for investment activity. The governments own spending programmes will also be viewed as more affordable as the deficit declines.

Of course,a decline in the fiscal deficit is by no means a free licence for the government to spend more,carelessly. Fortunately,the evidence suggests otherwise. The government has increased its productive capital spending sharply in the first five months,while keeping its revenue spending at the same level as last year. Plan expenditure has also grown faster than non-plan expenditure. Importantly,in a ministry-wise breakdown of spending,the ministries of home,agriculture and HRD come out on top in terms of expenditure growth,which seems reasonably in line with the right priorities. The government must,of course,keep focused on the task of eventually bringing the deficit down to below 3 per cent of GDP.