ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Budgetary Policy as Process, Not Event

The Budget for 2001-2002 seeks to kick-start growth through a host of measures including the speeding up of agricultural reforms, furthering financial reforms especially in the debt market, widening the tax base, etc. Central to the strategy, however, is fiscal consolidation and the reductions announced in administered interest rates on contractual savings which were supported by the pre- and post-budget cuts in the Bank rate announced by the RBI.

One of the greatest lessons that economics has taught us in the past couple of decades is that policies must be interpreted as processes, not as events. Thus questions like what happens if the income tax rate is decreased are not meaningful when considered in isolation but only in context. The decrease of the tax rate affects decisions to supply labour or consume and save one way if it is perceived as temporary, in another way if it is perceived as permanent, and in still another way if it is perceived as part of a series of further tax decreases. It is thus important to think about how each event influences expectations of future government actions. And unfortunately for governments it is difficult to make credible commitments about their future behaviour – they can at best attempt to send promising signals.

One of the macroeconomic indicators where there have been many lapses as far as government’s commitment to improve the indicator is concerned has been the fiscal deficit. In this budget the finance minister has claimed credibility by keeping the fiscal deficit figure on target. One of the undesirable consequences of concentrating on fiscal deficit figures has been that a reduction or containment of the fiscal deficit is deemed to be an unambiguously good thing. However, the fiscal deficit measures the change in the explicit liabilities of the government whereas a measure of the deficit of the government should inform us as to what has been the change in the net worth of the government. This is because a change in net worth is the difference between the change in the government’s assets and all its liabilities and so if a government reduces its debt accumulation (fiscal deficit) by lowering its accumulation of assets or increasing its accumulation of liabilities, then, it is not clear whether some fiscal adjustment has actually occurred.

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