Govt sticking to fiscal deficit target a big relief: Economists

While welcoming the government's proposal of reviewing the medium-term fiscal framework, Rathin Roy, director, NIPFP said that it was a relief that the finance minister has chosen to stick to the fiscal deficit targets

The assurance that the central government would stick to the fiscal deficit target of 3.5 per cent of gross domestic product in 2016-17 is a big relief, said economists at a post-Budget conference organised by five leading think-tanks in Delhi.

But, concerns were raised about the manner the target is to be achieved. Particularly worrying is the government's over-reliance on non-tax revenues - it hopes to mop up roughly Rs 1.6 lakh crore through disinvestment and spectrum auctions. Concerns were also raised about the lack of a clear framework for the social sector.

The post-Budget conference was organised by the Centre for Policy Research (CPR), International Council of Research on International Economic Relations (ICRIER), India Development Foundation (IDF), National Council of Applied Economic Research (NCAER) and National Institute of Public Finance and Policy (NIPFP).

While welcoming the government's proposal of reviewing the medium-term fiscal framework, Rathin Roy, director, NIPFP said that it was a relief that the finance minister has chosen to stick to the fiscal deficit targets. More so, given the government essentially borrows for funding consumption rather than investment.

Pratap Bhanu Mehta, president, CPR, was sceptical about the underlying message. Mehta argued that there is an inherent contradiction at the heart of the debate over fiscal deficit. If the economy is truly growing at 7-7.5 per cent annually, why is there a need to push public investments? Mehta contends there is no acknowledgement by the government of the deep hole we are in, which is ironically spelt out in the Economic Survey.

On the state of the political economy, in a searing indictment, Mehta said that its original pact with the "right" that they focus on cultural issues, while the government focuses on economic issues has given way to a new situation where it seems that the government will invest all political capital it has left on fighting cultural battles.

On the other hand, Roy and other panelists argued that several unglamorous but important reforms have been initiated by the government, which have received little attention. Prominent among them are simplifying business processes and simplifying and rationalising taxes.

But Roy worried that the share of subsidies in government expenditure has not fallen despite a fall in crude oil prices. On the issue of pruning government expenditure, it is perplexing that reports of the Expenditure Management Commission, which was supposed to lay down the road map for rationalising government expenditure, have not been placed in public domain.

While much has been written about the increase in allocations to agriculture, Shekhar Shah, director-general, NCAER, contends that the interest subvention scheme is essentially a transfer from the ministry of finance to the ministry of agriculture. He also questioned whether the benefits of the scheme were percolating to those who needed it the most.

On the issue of social sector spending, S K Shanthi, director, IDF bemoaned the government's lack of focus. According to her calculations, the increase in social sector has been minuscule, to the tune of 0.3 per cent of the gross domestic product in the recent Budget. Mehta also expressed concerns about the complete absence of a framework regarding the social sector. Shah too questioned the government's strategy of rolling out insurance schemes arguing that there are flaws in insurance markets, particularly in agriculture, even in the most developed economies.

While one could argue that with the 14th Finance Commission increasing the states' share in the divisible pool to 42 per cent, states are free to spend as they choose, Shanthi argued that it is difficult to say whether the increase in untied funds had led to states spending more on social sector.