Fiscal Deficit And Economic Reforms

A few economists even went so far as to say that the fiscal deficit was not as serious a problem as the Bank was making it out to be. To begin with, the fact that 48 per cent of the gross tax revenues of the Centre (60 per cent of revenues net of the share of the states), went into paying interest on past debt was misleading. If one took the combined revenues of the Centreand the states, their interest payments made up only 37 per cent of the total tax revenues. What is more, about a third of the debt of the Centre was notional because it was funded by the provident fund (PF) of its employees. Withdrawals from the PF were more than offset by the stream of new contributions. The importance that the country report attached to the fiscal deficit was therefore exaggerated, and was no more than a cloak for its desire to influence India's economic policies more actively than in the past.

 

The second objection is rather obviously unsound. By its logic since the nationalised banks also `belong' to the government, and always receive more by way of fresh deposits than they pay out as withdrawals, a loan from them too is only notional. By that reckoning, most of the national debt is only a mirage. But the first argument too is equally self-defeating. If anything the Bank has failed to emphasise the seriousness of the consequences of India's persisting fiscal deficit.

Most people in India believe that the main effect of a high deficit is to keep up the rate of inflation. This forces the country to keep devaluing the rupee, which in turn continues to fuel inflation. In an extreme form this was the experience of the Latin American countries ever since World War II. However, if a 2 to 3 per cent higher inflation and a gradual devaluation of the rupee were the only consequences, India would have been able to live with it. The truth is that this is only the beginning of the damage. The fact is that if it persists, the fiscal deficit will completely undermine the country's efforts to become fully competitive with other countries, and thus endanger its economic viability. It will also put paid to the increase in investment in human development, that the Left so greatly desires.

A look at the way in which the fiscal deficit works its way through the economy makes this obvious. Its first impact is to fuel excess demand in the economy. But this does not only raise prices: it also alters the balancearly the fiscal deficit can no longer be ignored.