Fiscal Conservatism All the Way

The Union Budget 2011-12 is one of those financial blueprints which some years from now will either have been forgotten altogether because it was so prosaic, or if it is remembered, it will be because it set the government on an unsuccessful path to combat inflation and deal with a huge current account deficit. The second is more likely, for the budget has made government finances hostage to “fiscal responsibility”. Budget 2011 seems to want to give priority to deficit reduction over everything else in the (mistaken) belief that this will control inflation. But in the attempt to narrow the deficit in 2011-12, Union Finance Minister Pranab Mukherjee makes such unrealistic assumptions that the year is going to end with both revenue and expenditure off target and the fiscal deficit quite different from what has been budgeted. Where will this leave inflation we will only know during the course of the year.

It was while presenting Budget 2010-11 that the finance minister outlined a return to fiscal consolidation. The current financial year, 2010-11, will end with an even better fiscal deficit-GDP ratio than was budgeted: 5.1% according to the revised estimates (RE) as against 5.5% according to the budget estimates (BE). It does not bear repeating that this “achievement” has been largely on account of the huge revenue bonus flowing from the maniacal bids made for the 3G/Broadband Wireless Access licences and to a smaller extent due to the revision of the new Wholesale Price Index series (which has enlarged the valuation of the GDP). But this has not prevented Budget 2011-12 from becoming more ambitious and aiming for the even smaller fiscal deficit-GDP ratio of 4.6% in 2011-12, lower than the target the finance minister had himself set for the year back in February 2010.