ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Need to Rethink Fiscal Strategy

The dispute between the finance ministry and the Planning Commission on the fiscal deficit for 2006-07 is indicative of the dilemmas that the government now finds itself in, after the passage of the Fiscal Responsibility and Budget Management Act. The focus on reduction in deficit numbers is counter-productive and needlessly ties the hands of the government. The ban on government borrowing from the RBI from April 2006 onwards, except for ways and means advances, is yet another new constraint on resources. There is therefore a need to rethink the government's fiscal reform strategy. Apart from more dynamic measures of resource mobilisation, the focus of attention should shift from the size of the gross fiscal deficit to the productive purposes for which deficits are incurred. Increasing social expenditures will also create some pressure on the revenue deficit of the government, which will have to be tolerated. Fiscal discipline and prudence are better achieved by concerted reforms on the administrative front, including effective decentralisation, rather than by controlling single measures like government deficits.

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