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‘If Policies On Fiscal Deficit Go Bad, All Bets On Inflation Are Off’

The honorary professor at ICRIER shares some of his concerns about Budget 2012

‘If Policies On Fiscal Deficit Go Bad, All Bets On Inflation Are Off’
Sanjay Rawat
‘If Policies On Fiscal Deficit Go Bad, All Bets On Inflation Are Off’

Veteran economy watcher Dr Shankar Acharya, currently honorary professor at ICRIER, is none-too-optimistic about the government being able to achieve its fiscal consolidation plan or reforms agenda. In an interview with Lola Nayar, he shares some of his concerns about Budget 2012. Excerpts:

How would you describe this year’s budget?

It is more middle-of-the-path. It tries to do too many things to please too many groups. It is full of things like provision for expenditure in some areas, small tax exemptions for this or that group...this is why some people are calling it a 1980s budget. It lacks two or three thematic elements.

Like addressing fiscal deficit and putting reforms forward?

Overall, it is an average budget. It has some good points and some bad points. On fiscal consolidation, one has to scrutinise the numbers more carefully before one gives a real judgement. But on the surface, I must say I have some doubts on petroleum/diesel, kerosene, lpg subsidies. This year, it has been shown at around Rs 75,000 crore and next year it is shown to be coming down to around Rs 40,000 crore, which cannot happen on its own unless one assumes that there are price increases fairly early on in the new fiscal year.

“A middle-of-the-path budget, it tries to do too many things to please too many groups. I’ve reservations about the 5.1 per cent fiscal deficit target.”

The budget has done the right thing about raising the excise duty and service tax (and bringing in a general negative list for the latter). They have also done the right thing by lifting customs duty on gold by a small amount. It will make a difference as gold imports have been soaring. So it has some good points in terms of fiscal consolidation. But I have reservations on whether the 5.1 per cent fiscal deficit target will be met as there is nothing in the budget or budget speech of any commitment to raise the major controlled prices of petroleum products, fertilisers and food.

On the contrary, we have a commitment that subsidies required for the Food Security Bill will be fully funded. The open commitment is one of the reasons for my doubting fiscal consolidation. On the reform side, there are no big ticket reform announcements—which I had expected. But there are smaller reforms such as the extension of Aadhar for purposes of distributing various government benefits to beneficiaries as well as talk about using an electronic system for distribution of fertiliser subsidy. Maybe a year from now, the fertiliser subsidy will go directly to the retailer and the farmers’ hands. So there are some reform measures tucked away.

On inflation, are we through the worst yet?

I think probably, but we might still get an uptick in headline WPI or even CPI in the coming weeks because of the base effect kicking in at some point. This is, of course, assuming that we maintain reasonable policies on such things as fiscal deficit. But if they go off, then all bets are off inflation for the coming few months. The other thing one needs to qualify is what happens if there is a big external shock either from Europe or something to do with Iran, which could upset things.

What sort of a balancing act can address issues of fiscal deficit and growth demands?

The low growth we are now experiencing is self-inflicted as it has been due to bad policies. You can sort of justify the fiscal deficit in 2008-09 because of the global crisis and so on, and perhaps also in 2009-10, but we should have really exited from this kind of loose fiscal policy at least two years ago. One reason we failed to do that is because the so-called fiscal stimulus of those earlier years was not really a fiscal stimulus. It was simply a ramping up of two kinds of populist spending. Firstly, the large subsidies, particularly on petroleum products; secondly, because of the ramping up of populist programmes, whether it was rolling out the NREGA scheme, or the Sixth Pay Commission, or the farmers’ loan waiver, or the Right to Education Bill, or the now pending Food Security Bill. We have to reverse some of these bad policies in order to revive growth. Fiscal deficit is not the only story.

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