11/5/2014

Growth and austerity - The Hindu

Opinion Editorial
Growth and austerity
The austerity measures unrolled by the Finance Ministry last week send out a clear signal that all is not well with
government finances; at least, not yet. Though business sentiment has improved noticeably and some key indicators
point to a pick-up in growth, government expenditure is running well ahead of revenues, which have not grown at the
expected pace. Thus, the Finance Ministry has been forced to order a cut in all discretionary spending; the target is to
prune expenditure, other than Plan-related, by 10 per cent. The only exceptions are interest payments, debt
repayments, defence capital, salaries, pensions and grants to States. These occupy a large proportion of non-Plan
expenditure, which means that the savings might not be much. Yet, the fact that the government deems this
necessary shows the seriousness of the problem that it faces in keeping the fiscal deficit in check. Indirect tax
collections have grown at just 5.8 per cent in the first half of this fiscal compared to the budgeted target of 25.8 per
cent. On the direct taxes front, refunds have eaten away almost half of the incremental collections, which have
otherwise been on target. Adding to the governments woes is the sharp rise in defence pensions due to the
implementation of the one-rank, one-pension scheme. Outgo on this is expected to shoot up by 40 per cent, or
Rs.16,000 crore, this fiscal. Importantly, this was not budgeted for fully.
It is not all gloom, though. The fall in global commodity prices, notably of crude oil, and the freeing of diesel prices,
have given elbow room to the government in pruning subsidies. The subsidy on cooking gas and kerosene, as also on
fertilizers, will fall significantly. Oil prices are down by about a quarter since the time the new government assumed
office and look set for a subdued phase, barring a rise in geopolitical tensions in the Middle East. Meanwhile, the
government should push forward on disinvestment, receipts from which are budgeted at Rs.58,425 crore this year.
After an initial burst of activity in September, action appears to have slowed down on this front. The markets are on
song now and this is the best time to capitalise by offloading stakes in public sector undertakings to retail investors.
Experience shows that it is not a great idea to push back the share-sale process closer to the end of the fiscal. The
spectrum auction, expected in February 2015, is another big revenue source-in-waiting. With 83 per cent of the fiscal
deficit already reached by the end of September, the government will be hard-pressed to keep the deficit down to the
target of 4.1 per cent of GDP for this fiscal. While austerity will help, all possible avenues to boost revenues have to be
explored so that capital spending does not suffer.
Keywords: Indian economy, austerity drive, economic measures
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