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Fiscal imperatives

Mid-Year Analysis shows government has daunting task

Business Standard Editorial Comment  |  New Delhi 

The Mid-Year Economic Analysis, prepared by the finance ministry, was tabled in last week. Part of the sequence of formal disclosures by the executive to the legislature, much of the assessment of the state of the confirms what analysts have been saying over the past few weeks. The is recovering, as a consequence of both favourable external developments and actions taken by the The Analysis lists a number of steps taken by the that have contributed to both positive short-term outcomes, such as lower food inflation, and the capacity for more equitable growth, through financial inclusion. However, its most important contribution is its assessment of the fiscal situation, which highlights the fundamental dilemma that the is facing on this front and the risks that it poses to the growth prospects of the

On the revenue side of the equation, the Analysis estimates that there will be a shortfall of over Rs 1 lakh crore compared to the projections. Aggregate revenue has been growing at about 10 percentage points below the numbers, despite the fact that growth of gross domestic product, or GDP, has been showing some signs of recovery. With this kind of shortfall, the assurance that the deficit target will still be met may appear somewhat naive. It is obviously going to put an enormous amount of pressure on the to both cut expenditure in the remaining months of the fiscal year and aim for high realisations from disinvestment in a somewhat unstable global financial environment.

If the short-term challenges don't seem daunting enough, the Analysis takes a strong position on the issue of reviving the stalled momentum in infrastructure. It virtually admits that the public-private-partnership model is now defunct. The only way to get infrastructure going again is through expanding public investment. This is, in fact, an inevitable conclusion emerging from the financial condition of major promoters and the burden that incomplete projects are imposing on the financial system. Without at least some of these projects being completed, there is little prospect of growth breaking out of the current range, and this is not going to happen unless the entire financial framework is changed. In a nutshell, the short-term and long-term pressures and compulsions have put the in a "damned if you do, damned if you don't" situation. If the deficit commitments are to be met, expenditure must be sharply reined in. If the growth priorities have to be facilitated, expenditure must be sharply increased. Finding a viable balance between these contradictory elements is clearly the challenge that the has to rise up to in the for 2015-16.