Fiscal prudence by fiat?

By S. Swaminathan

Budget-making is no longer a strategic developmental exercise linking public policy, over a period, to the optimisation of use of financial resources available in terms of priorities in spending.

It has been reduced to the art of dressing up the arithmetic to respond to the ``expert demand'' for reduction of fiscal deficit. Dr. Manmohan Singh began in 1991 the process of bringing down the fiscal deficit as a percentage of gross domestic product.

From an average level of 7.3 per cent (in the Eighties), the deficit percentage came down to 5.9 in 1991-92 but thereafter showed some stickiness with the average level persisting at 5.6 per cent (1991-98).

Mr. Yashwant Sinha, like his predecessors, Dr. Singh and Mr. P. Chidambaram, has sworn by the mantra of deficit reduction. In the budget for 1999-2000, he targeted a fiscal deficit of 4 per cent in terms of the GDP but the going indeed has proved tough, as the indications clearly point to a higher than 5.5 per cent level.

``Hard decisions'' being trumpeted even before the budget for 2000-01 is unveiled are perhaps all about the magic number of the fiscal deficit being shown at 4 per cent again or even at a lesser level.

Fiscal analysts familiar with the ground realities of budgetary policy have not all found it possible to agree on fiscal deficit reduction as the summum bonum of budget-making.

There are other weighty considerations involved such as strengthening of the social sector (through universalisation of elementary education, imparting a vocational bias in higher stages of schooling, and the assurance of access for rural and tribal communities to basic medicare) and the building up of basic amenities - safe drinking water, shelter, road connectivity and so forth - for the masses.

An ambivalent doctrine

It is an aspect of the globalisation wave sweeping the developing countries that the essence of fiscal prudence (the opposite of which is the much-bandied term, ``fiscal profligacy'') is said to reside in the fiscal deficit.

To put it more crudely, if a government desists from borrowing, it is deemed to be an exemplar of fiscal prudence, no matter what the state of development of its economy is. The process of European monetary integration predicated not more than a 3 per cent level of fiscal deficit for countries which could qualify for the Euro common currency.

What is the sanctity of this 3 per cent norm or of the chorus of advisers hammering away the prescription to the Finance Minister of India that he should address the challenge of fiscal correction, first and foremost?

It is not that the tendency for the Government to borrow (as a lazy option to hard-headed resource mobilisation - through taxes and non-tax revenue - and to a resolute course of ensuring cost- effective public expenditure) needs to be celebrated as the epitome of fiscal courage. Such a course of policy inflicts a high cost on the unborn generations in terms of debt-servicing.

It is also true that large government borrowing from the market pre-empts resources which would otherwise be available for the private sector although the relevance of this factor to India, in its present stage of development with the private sector not daring to invest in infrastructure in any pronounced manner, does not appear too obvious.

That huge drafts being made by governments on the pool of savings result in high interest cost cannot be disputed even if questions need to be raised about monetary policy itself being privy to high interest-regimes, of course, in the blessed name of inflation management.

Given the more recent concatenation of high fiscal deficit and low inflation, can it be dogmatically asserted that inflation is the progeny of fiscal deficit?

Statute v discretion

The view that a Finance Minister in India, at the Centre or in the States, is a pathetic captive of a political system which puts a premium on fiscal deficits, is not widely held.

In the popular perception, on the contrary, the Finance Minister is regarded as a conjuror who can perform feats of financial brilliance in almost the same way as a Pablo Picasso could produce a masterpiece defying description! Despite all canons of collective Cabinet responsibility, the Finance Minister and his team create the architecture of a budget.

As for the Government as a whole, budget-making is an important executive prerogative and may even be described as the very touchstone of its collective personality.

Economists and experts in the policy domain who fancy statutory mandates as the best method of ensuring that the country secures the benefits of ``fiscal responsibility'', appear either to be too fatalistic about Finance Ministers being driven by political pressures all the time or too naive about statutory enactments obligating Finance Ministers to stay within the tethers of fiscal prudence, being defined as the reversal of revenue deficits over a given time-frame and the application of long-term debt judiciously to essential capital expenditure projects.

All such neat formulations are bound to collapse against a massive interest burden which takes away 50 per cent of the revenue. The explosive increase in public debt, mostly in internal debt, is already a fact of life.

If the RBI takes the view that the interest factor and the subsidies together constitute the most impregnable (``structural'') component of the fiscal deficit, it is not to condone it but to explain that expectations regarding the imminent dissolution of the revenue deficit and the eventual containment of the fiscal deficit lack logical strength and may perhaps be incompatible with a realistic understanding of the gradualness of fiscal reforms.

While the menu for liberalisation, so far, has included deregulation, dismantling of import controls and removal of restrictions on current account convertibility, nothing much has even been attempted in the crucial area of public enterprises where surpluses based on productivity and efficiency can provide a valuable addition to the investible resources of the public sector.

The case of subsidies where inefficiencies and leakages abound cannot certainly be tackled by the Finance Minister in the absence of a major political consensus in the country. ``Hard decisions'' in the budget cannot obviously chime with a preponderantly ``soft state'' however much Mr. L. K. Advani may seek to refute the characterisation!

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