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Numbers will tell

Why the government must not fudge on withdrawing the fiscal stimulus.

Written by The Indian Express |
February 22, 2011 10:48:41 pm

Budget 2011 must indicate a withdrawal of the fiscal stimulus. The rise in inflation,a high GDP growth rate,a big current account and a large fiscal deficit are unsustainable and have led to overheating of the economy. In last year’s budget,Finance Minister Pranab Mukherjee did not withdraw the stimulus enough and the fiscal deficit remained large. While at that time there was uncertainty about short-term growth prospects and it was a risk to withdraw the stimulus,today the situation is different. Indeed,fiscal consolidation is important if India is to regain the confidence of private investors,both foreign and domestic. It is important to show that India is on the path of prudent fiscal policy.

The withdrawal of the stimulus has to be done on both sides of the fisc. Excise duty rates,which were cut in order to give an impetus to the economy,need to be brought back up. This is an opportunity for the finance minister to have a single rate for goods and services and combine them into a Central GST in a single administration and offer refunds of taxes paid. The second reform has to be on the expenditure side. India today looks like a country on a path of borrowing and spending its way to a fiscal mess. This impression has arisen as year after year populist programmes have been added by the Central government to the list of schemes it runs. However,proper implementation and assessment of the expenditure undertaken have been missing. Whether by moving to conditional cash transfers or by moving to food and kerosene coupons,the government needs to increase the efficiency of the money it spends.

It will not be that difficult,at least on paper,to control the fiscal deficit this year since the nominal GDP number,by which the deficit number is divided,has risen sharply by 20 per cent over the last year due to high inflation. This is expected to make the number look small at first blush. However,if the growth rate of expenditure on various populist schemes remains high,or any new scheme or increased coverage is announced,the discerning will soon detect it and it will be seen as an attempt to fudge the withdrawal of the stimulus. This would only undermine the credibility of the government,something it cannot afford in the current investment climate.

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