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Time to rein in revenue expenditure

It would help if the government could instead boost capital expenditure

Business Standard Editorial Comment  |  New Delhi 

In the run-up to the Narendra Modi-led central government's third Union Budget, its commitment to fiscal consolidation is being closely watched. The importance of stability in a financially turbulent world cannot be underestimated. Therefore, the logic of conservative fiscal management is beyond question. There have, however, been some doubts over the fiscal road map the government had committed to, born of a series of warnings about the inevitable trade-off between deficit reduction and Plan expenditure in the coming year. In addition, low nominal growth means targets are harder to meet when expressed as a percentage of nominal output. The government has sought to set these worries to rest. But there is no question that several fiscal road-blocks lie in the immediate future. One is the need to move forward on public sector bank recapitalisation - a focus on them raising some of that money in the markets is good, but in practice will be hampered in the future by their low market capitalisation when compared to how much they will need to deal with stressed assets and Basel-III regulations.

Another possible fiscal road block is the implementation of the Seventh Central Pay Commission award. The finance minister suggested after receiving the Commission's report that the impact of the award would amount to 0.6 per cent of gross domestic product (GDP). This would make his Budget process, and meeting his deficit reduction targets, that much more difficult. It is time, perhaps, for some innovative approaches to the Pay Commission award. As a report in this newspaper indicated, one possibility is that its implementation could simply be staggered or delayed for a year. This should not mean, of course, that arrears are built up to be paid in the subsequent fiscal year; it should just be a straightforward delay. While there will no doubt be protests from government employees, it is likely that in the current low-inflation environment, these protests will be muted. In any case, there will be few political costs in the short term. The ruling party is only competitive in one of the coming elections to state Assemblies, in Assam; and the Pay Commission award will hardly be a make-or-break election issue in that state. Delaying the award will, however, have a significant up-side. It will allow the fiscal consolidation process to continue steadily, without compromising on infrastructure expenditure. There are other areas of revenue expenditure like subsidies where closer scrutiny could lead to lower spend. The government had raised its commitment to infrastructure expenditure by an estimated Rs 70,000 crore in 2015-16, but the impact of that has been limited. The spending needs to be more sustained to be effective and it would help if the government could rein in its revenue expenditure and boost capital expenditure, which this year would languish at about 13 per cent of the total size of the government's Budget.

In the end, what matters above all is a government's credibility. The government has built up some credibility by accepting targets chosen before it came into office, and by meeting them last financial year. This year, too, the fiscal signs have been positive. The first eight months of 2015-16 saw the fiscal deficit reach 87 per cent of the full year's target, as opposed to the 98.9 per cent it touched in the equivalent period in the previous financial year. Meanwhile, Plan expenditure was relatively front-loaded. A closer look at its revenue expenditure would enhance this reputation for responsibility. It might even create space for a more creative approach to the fiscal consolidation road map. It will have an opportunity then to move the debate away from specific numbers.

First Published: Thu, January 21 2016. 21:40 IST