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Homage to Deficit Reduction

ECONOMIC AND POLITICAL WEEKLY Homage to Deficit Reduction The core philosophy of the central government budget for 2006-07 is to be found not in the budget speech but in an interview of union finance minister P Chidambaram.

March 4, 2006


Homage to Deficit Reduction

he core philosophy of the central government Economic Survey 2006-07), speaks volumes for the budget for 2006-07 is to be found not in the UPA government’s way of thinking. budget speech but in an interview of union finance Even from the government’s narrow priorities of deficit minister P Chidambaram. “I said I will draw a red, thick reduction, there is no indication of any secular trend. line and I will not breach it…Because I have to compress Consider, first, the performance in 2005-06 when the (the) fiscal deficit and revenue deficit, I drew that line, revenue and fiscal deficits have been brought down to took the revenues and factored out the non-plan 2.6 per cent and 4.1 per cent of GDP (revised estimates, expenditure and that left me this money, which I said RE), respectively. On the revenue side, credit is due, I am going to distribute” (Business Standard, March 2, to be sure, to P Chidambaram for pulling off a 21 per 2006). If there is one thing India should have learnt after cent growth in gross tax receipts, a target that seemed 15 years of flirting with fiscal fundamentalism, it is that unlikely a year ago. Yet, there do seem to be special homage to deficit reduction is not necessary for economic reasons for the achievement in 2005-06: customsrevenue growth and certainly harms equity. Yet, in the tradition has been 21 per cent higher than budgeted, surely mainly of the finance ministers of the past decade and more, on account of high global oil prices. At the same time, P Chidambaram too sees great virtue in such an approach. collections from both corporation tax and excise have been Having tied its hands with the Fiscal Responsibility and below expectations. The only positively unambiguous Budget Management Act, there is, of course, a limit to development has been the buoyancy in revenue from what a government can do through the budget; but the service tax. On the expenditure side, credit must be United Progressive Alliance finance minister has been given to the finance minister for not making the Plan more than enthusiastic about releasing his “pause” button outlay hostage to deficit targets and fulfilling the very of 2005 and going fast forward in 2006 to achieve his modest 4.4 per cent increase targeted for 2005-06. The deficit reduction goals. savings in non-plan expenditure – which have essen-Three consecutive years of rapid macroeconomic tially contributed to deficit reduction – have come mainly growth gave P Chidambaram the opportunity to tinker from three one-off factors: lower than budgeted with revenue priorities and bolster outlays. In budget interest payments (because of higher accrued interest 2006-07 he has chosen to do neither. The impressive from re-issued securities), lower grants to states budgeted growth in spending in the next fiscal on what (because of lower compensation for losses in introduche calls the UPA’s flagship social programmes hides tion of value added tax) and a smaller food subsidy as much as it reveals. And in opting to ride the recent (because of lower procurement and higher offtake). trends in revenue growth, he has decided not to address What of 2006-07? A further and major reduction in the gross inequities in the tax structure – namely, the revenue and fiscal deficits has been targeted, to 2.1 per near abolition of long-term capital gains taxation and cent and 3.8 per cent of GDP, respectively. Some the absence of taxation of dividends, both of which place assumptions do seem unrealistic (for example, a 28 per returns on capital on a higher pedestal than income cent growth in corporation tax revenue), but it is the from labour. No defence can be offered for blanket promise of a major leap in Plan and social sector spending state intervention in all economic and social spheres, within this deficit reduction drive that demands close but a governance policy that speaks only of “quality scrutiny. In the 2006-07 budget estimates (BE), versus quantity” in government spending and dismisses allocations for what P Chidambaram calls the UPA’s fiscal expansionism as “reductionism” (both in the eight “flagship” social sector programmes are to leap

by43.2 per cent. Consider, however, the six main flagshipprogrammes on rural employment, school education, rural healthcare and urban renewal. First, with much of the expansion of the rural employment programme taking place last year, the next fiscal will see only a 10.7 per cent growth in funding over 2005-06 RE for the biggest of the UPA’s flagship programmes. Second, the Rs 4,595 crore allocation for the Jawaharlal Nehru Urban Renewal Mission represents a manifold jump over the Rs 884 crore spending on urban programmes in 2005-06 RE, but it is less than the Rs 5,400 crore provided in 2005-06 BE. Third, the combined allocation for the Sarva Siksha Abhiyan and the mid-day meal scheme is Rs 14,854 crore, a huge 45 per cent more than in 2005-06 BE. One must bear in mind though that as much as Rs 8,046 crore of this amount will come from the education cess. It is only in two of the smaller programmes – the National Rural Health Mission and Integrated Child Development Services – that there is an unambiguous growth in funding of Rs 3,142 crore.

In his speech on February 28, P Chidambaram made much of the UPA government’s feeling of “compassion”. If the finance minister wanted to give expression to this compassion, he could have paid heed to some startling statistics in the Economic Survey. The National Sample Survey shows a substantial increase in the rates of unemployment and underemployment, for men and women, in rural and urban areas over the decade 1993-94 to 2004 (January-June) – the very decade of reform and growth. EPW

Economic and Political Weekly March 4, 2006

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