Opinion Falling short, again

The Centre’s finances aren’t in great shape as we enter the new year. The fiscal deficit during April-November has hit 98.9 per cent of the target for the entire financial year ending March. It’s worse for the revenue deficit, where the figure over the first eight months has already crossed 108.6 per cent of the budget estimate for 2014-15. The main villain here is revenues: While the budget had projected gross tax collections to post a 19.8 per cent growth for the fiscal, the actual increase so far has been under 6.5 per cent. Finance Minister Arun Jaitley might still manage to meet the deficit targets through across-the-board Plan spending cuts. His predecessor in the UPA, P. Chidambaram, did precisely that by slashing it by Rs 1,07,400 crore in 2012-13 and by Rs 1,02,237 crore in 2013-14 over their original budget provisions respectively.

Such an approach is counterproductive for two reasons. First, even while finance ministers may claim not to have breached the “red line” as far as deficit targets go, the credibility of it is likely to be questioned even by the markets. The quality of fiscal correction eventually matters as much as the quantum. Second, expenditure compression — especially involving Plan capital investments — isn’t a great idea in the current scenario of weak growth. If anything, it will further hurt growth, investment and consumer spending, which, in turn, leads to lower tax revenues. The economy is, then, trapped in a vicious cycle of widening deficits and low growth. Today’s situation, indeed, demands more public investment to kickstart an economic recovery. As growth returns, the deficits may well take care of themselves. We saw this during 2002-03 to 2007-08, when the Centre’s fiscal deficit fell from 5.7 to 2.5 per cent of the GDP on the back of a roaring economy.

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The coming budget should look at more dynamic fiscal targets, linked to realistic growth and revenue buoyancy scenarios both in the short as well as medium term. The cause of fiscal consolidation is unlikely to be served by rigid targets not factoring in troughs and crests in the economic cycle. Ideally, deficit reductions should be sharp during upturns and mildly accommodative — specifically to support growth-promoting public investments — in downturns. But any such “counter-cyclical” fiscal policy has to be rule-based. We cannot afford a repeat of 2008-09, when the previous UPA regime used the global economic crisis as a pretext to throw all fiscal caution to the wind. A credible and transparent glide path to sustainable deficits is what the budget should unveil.