India's Finance Minister Pranab Mukherjee pledged to reduce the country's fiscal deficit to 5.1 per cent of gross domestic product in the next fiscal year from 5.9 per cent this year in his budget speech on Friday. Those familiar with India's recent track record on deficits know these are promises often meant to be broken. This year's actual deficit far exceeded the 4.6 per cent the budget targeted a year ago.
These numbers fall short of India's fiscal consolidation targets of 4.2 per cent of GDP in the coming fiscal year and 4.8 per cent of GDP in the current fiscal year. The ratios are also lower than the government's targets in its five-year plan of 4.1 per cent in fiscal 2012-2013 and 4.6 per cent in fiscal 2011-2012.
In the whole exercise of number juggling, it would have been unrealistic to expect the finance minister to set a lower deficit target, given the huge subsidies bill the government shoulders.
The overall spending will be up 18 per cent next year with most of it going to sectors such as education, health care, housing, agriculture and irrigation. None of the above is undesirable. But in the order of priority deficit reduction should have been given precedence lest growth be the first casualty.
The Reserve Bank of India left interest rates unchanged at 8.5 per cent for a third meeting on March 15 clearly indicating its uneasiness with the inflation risks. With a high-deficit target and high probability of the actuals exceeding the target, the scope of monetary stimulus to a slowing economy appears distant.
Mukherjee wants the economy to grow at 7.6 per cent. Deficit is inflationary. RBI can't fuel it with low interest rates. Obviously economic growth will take a hit. The budget appears to be caught up in a maze of conflicting priorities. The way out is not easy, but a ‘credible' fiscal consolidation could help.
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