The roadmap for fiscal consolidation unveiled by the finance minister on the eve of the second quarter monetary policy failed to persuade the Reserve Bank of India (RBI) to reduce policy rates. Of course, one can take a conservative view that even after the recent slew of reforms, the fiscal situation continues to be precarious and with a persisting, uncomfortable inflation rate, reducing policy rates at present would be unwise. However, a more proactive stance could have been to reduce the policy rates by 25 basis points as, in part, the high inflation rate in September was due to the increase in the price of diesel, and generally the economy sees a seasonal decline in prices from November to March, and therefore the risk involved was marginal. Anyway, RBI took a conservative stance of waiting for the inflation rate to decline further before reducing the policy rate. Tweaking the CRR by 25 basis points will not ease much liquidity as the banks are required to increase provisioning for restructured assets from 2% to 2.75%.
The fact of the matter is that the fiscal consolidation plan put out by the Union finance minister was not persuasive enough to goad RBI into acting on the policy rate. Although the finance minister?s statement was important and helped to clarify the position of the government, the consolidation path chosen is considerably more prolonged. Furthermore, the strategy and package of measures that will be adopted to achieve consolidation are not clear. Of course, the finance minister has endorsed the recommendations of the Kelkar committee on disinvestment and on measures to improve the tax collection, including mining of data collected in the tax information network with the help of professionals. He has also announced steps to expedite the transition to the goods & services tax (GST) and the passage of the direct taxes code (DTC) after a quick review. On the issue of reducing subsidies and transfers, Kelkar committee?s plan is to achieve a sharp reduction; the subsidies are to be reduced from 2.6% of GDP in a non-reform scenario or 2.2% in a reform scenario in 2012-13 to 1.5% in 2014-15 and plan expenditure on the revenue account to be reduced from 4% in the non-reform scenario to 3.6%. However, the finance minister states, ?All the flagship programmes designed to help the poor and bring about inclusive development will be fully protected in the revised fiscal consolidation plan.?
There are questions of credibility of the numbers. While the government in its Action Taken Report submitted while placing the finance commission report before Parliament had accepted its fiscal restructuring path, the medium term fiscal policy (MTFP) statement laid down in Parliament along with the budget in March 2012 was completely in variance with the commission?s targets both for 2013-14 and 2014-15 (See table). Interestingly, the Kelkar committee, which was asked to rework the roadmap for fiscal consolidation, gave its own roadmap and almost went along with the MTFP roadmap by taking a fiscal deficit target of 3.9% of GDP for the terminal year (2014-15) of its recommendation. It is not clear whether it now considers the new target as consistent with the ?feasible? level of outstanding liabilities of the Centre. The roadmap given by the finance minister is even ?softer?. It takes a longer route to reach the 3% deficit only in 2016-17.
There are doubts about the government?s ability to contain the fiscal deficit at 5.3% in the current year. The budgeted subsidy bill of R43,500 crore on petroleum products has already been exhausted and the recent increase in the price of diesel and other reforms cannot eliminate under-recoveries. The subsidy bill on both food and fertilisers would exceed the budget numbers. There will also be a shortfall in taxes. One important matter that even the Kelkar committee did not take into account in its estimate is the expenditure increase on account of increased DA payments over the budgeted amount due to higher-than-assumed inflation. Of course, slow implementation of some plan schemes, including capital expenditures, could help to contain the deficit, but that could hurt growth. Containing the fiscal deficit at 5.3% in 2012-13 will be a challenge and it is not clear how this will be accomplished.
The new roadmap outlined by the finance minister is to reduce the fiscal deficit by 0.5 percentage points in the first year and thereafter by 0.6 points every year until 2016-17. With elections due in 2014, if items like food security and universalised healthcare are rolled out, the adjustment plan may get a cropper. In the new scheme outlined by the finance minister, the government will have to reduce the fiscal deficit by 2.3 percentage points in the next five years. If, on a conservative basis, these items add 2% of GDP, the burden of adjustment will be almost 4.5 percentage points. The DTC, with all the revisions, may not add substantially to revenue productivity. As far as GST is concerned, after all the negotiations, it is not clear how the final shape will be. In any case, GST is designed to be revenue-neutral in the short run, and revenue productivity may increase only in the medium term.
All this calls for strategising the fiscal adjustment and the government should immediately start working on alternative scenarios and the strategies to be followed depending upon which one will hold. One-time payments like auctioning of spectrum can be useful; but secular reduction in the deficits cannot depend on such methods. Settling the disputes with taxpayers to reduce tax arrears must be followed up vigorously, but while constant effort on this front is necessary, it must be noted that the past record has not been encouraging. The government has been impressing upon public enterprises the need to invest their surplus cash, but many of these companies have the cash waiting for investment and, if forced, this could hurt their investment plans. That leaves a major recommendation of the Kelkar committee, of monetising the government land. In fact, the past record of governments in dealing with land has been anything but transparent and a big scam is likely to unfold in the not too distant future. Over the years, many zamindars lived on by selling land and became broke. Hope this will not happen to the government!
The author is director, NIPFP. Views are personal
