May 25, 2020
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The 5.5 Per Cent Question

When Finance Minister Manmohan Singh contended at the World Bank-International Monetary Fund meeting in Washington last week that he would be able to keep his budget promise to keeping the fiscal deficit at 5.5 per cent of the Gross Domestic Product

The 5.5 Per Cent Question

Charan D Wadhva
Research Professor, Centre For Policy Research

What is worriying is that expenditure has grown faster than the increase in revenue. Wages and salaries of government staff have overshot the budget by Rs 1,600 crore due to the decision to give 10 per cent interim dearness allowance. The government’s populist schemes, announced before August 15, have added another Rs 3,395 crore of unbudgeted expenditure. Besides, transfers to states have been much higher, and subsidies on food and fertilisers have exceeded targets. But the biggest burden comes from interest payments – as much as 52 per cent of revenue collected.

The only way out for the finance minister is to ensure that growth accelerates to six per cent, not 5.5 per cent as projected. For this, cheap credit must be available to industry. To do that, the governmnet has to reduce its own borrowings and ensure export growth, yet not clamp down on imports since collections from customs revenue need to be kept up. It must also monitor growth of revenue and ensure administrative compliane.

Importantly, the finance minister shouldn’t yield to populism anymore. The government must postpone any decision on the Pay Commission recommendations. If it doesn’t take these stringent measures, I foresee the deficit exceeding Rs 70,000 crore even if national income grows at 5.8 per cent.

Subhashis Gangopadhyay
Professor, Indian Statistical Institute

It’s tough to see the fiscal deficit target being met, due to the wasteful expenditure the Government has incurred n its populist schemes. Uncontrolled expenditure by the Government has forced it to borrow from the markets and credit is not available for industry. While increasing the deficit in the short term, due to high interest payments, it will also have an adverse impact in the long term as industry is short of funds. This will stifle industrial growth and revenues will come down.

The money available from PSU disinvestment should be used to retire borrowings and not to balance the budget. But most importantly, I don’t see any reason to increase pay scales of white collar public sector employees even if the Pay Commission so desires. This will enable the finance minister to get somewhat closer to his fiscal deficit target.

DH Pai Panandikar
Director General, RPG Foundation

Yes, I would definitely question the finance minister’s ability to meet the fiscal deficit target of 5.5 per cent of GDP. Primarily because the Government lacks the political will to cut expenditure. In fact, if not this year, certain expenditures need to be increased. I believe the Government needs to spend more on defence, education and public health. Unfortunately, it is spending more more on food and fertiliser subsidy, which is totally unproductive. The Government mustn’t spend any more on them this year and must abolish the subsidies as soon as possible.

The main problem is the high interest payments. Instead of the traditional route of deficit financing through the central bank, the government has now shifted to borrowing from the market at high interest rates in an effort to curb money supply and in turn, inflation. And the government’s borrowings this year have been able to control inflation, the high interest payments are playing havoc with the fiscal deficit.

The government must do two things: firstly, cut excessive non-plan expenditure and secondly, disinvest PSU shares at a faster rate. The revenue earning potential from PSU shares is enormous and the Government must divest itself of the controlling stake in PSUs.

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