The Hindu Business Line : For a return to fiscal austerity

A wise Finance Minister should not err on the side of excessive optimism, so far as Budget estimates are concerned. Normally, it would be better for him if events turn out to be more favourable than his projections. Economic forces do not depend on the state of expectations of political leaders. However, the time is ripe to put the finances of Central and State governments on a fiscal emergency basis. Otherwise the growing fiscal and revenue deficits now at the State level will lead to an intolerable and uncontrollable situation in the country's finances.

AS Budget approaches, there is naturally considerable concern about the state of the economy. The Central Statistical Organisation (CSO) has just released the latest estimate about the growth of real GDP in 2000-01. Against the earlier figure of about 5 per cent, the latest, quick, estimate puts the growth rate at just 4 per cent. This is a 25 per cent reduction in the estimated growth rate.

The CSO had released earlier the growth rates for the first two quarters of 2001-02. We do not yet have information about the third and the fourth quarters. If we assume that for the third quarter of this year the highest growth rate obtained in that quarter since 1997-98 — from when the quarterly estimates are being made available — would be reached, and the same is the assumption about the fourth quarter, we get a maximum growth rate of about 5.5 per cent for 2001-02. However, if we assume that it would be the lowest growth rates that obtained in the past, we get a growth rate of 4.5 per cent as probable for the current year. The mean of the two would be 5 per cent.

It would, therefore, be reasonable to project a growth rate of about 5 per cent for 2001-02. Since the average price level may be higher in 2001-02 by about 3 per cent over the previous year, probably at current prices the growth rate would be 8-8.5 per cent.

We should not blame the CSO for the lowered growth rate estimates for 2000-2001. The revisions are due to the current position that the growth rate in agriculture, forestry and fishing has been negative at - 0.2 per cent in 2000-01 against the advanced estimate for that year of 0.2 per cent; for one reason or the other, the Agricultural Ministry often seems to give an advanced growth rate higher than what actually turns out.

In mining and quarrying, the latest estimate of growth rate for 2000-01 is 3.3 per cent, less than the earlier projection of 3.7 per cent. However, the CSO has revised upwards the growth rate in the manufacturing sector for 2000-01 to 6.7 per cent from the projection of 5.6 per cent. Similarly, for electricity, gas and water, the CSO has placed the current estimate of growth rate for 2000-01 6.2 per cent, higher than the 1.7 per cent projected. In the construction sector too, the current estimate is 6.8 per cent against the projected 5.5 per cent. But it is in the financing, insurance, real-estate and business services sector that the current estimate of 2.9 per cent is substantially lower than the projected 9.1 per cent; similarly for the community, social and personal services sector, the projected 7.8 per cent has been revised to 6 per cent.

The overall growth rate now put at 4 per cent at 1993-94 factor cost against the earlier projected figure of about 5 per cent is justifiable in terms of the latest data. Why should the statistical organisation be blamed if the economy's growth rate turns out to be actually less than that projected on the basis of the then information? For 2001-02, as pointed out earlier, it would be foolhardy on the basis of the current information to project a higher growth rate than 5 per cent. This writer had earlier projected for 2001- 2002, a growth rate of 4.7-4.8 per cent. Any way, 5 per cent would be probably a more acceptable figure. There is no reason why suddenly the projected growth rate for 2002-03 should be more than 5 per cent.

We would submit that it would be prudent for the Finance Minister to assume for the next year — 2002-03 — a growth rate of about 5 per cent and depending on the effects of his policies an annual average rate of inflation of 3-4 per cent. Anyway at current market prices, GDP may not go up by more than 8-9 per cent. This means that his revenue expectations should be on the conservative side; this year's experience should not be repeated next year. The Prime Minister, it is reported, has taken credit for his Government for having followed a policy of low inflation rate in the prices of wage-goods. This means the Finance Minister had a choice of moving up the inflation rate and thus causing severe hardships to the poor or of continuing the policy of lower and lower inflation rates and thus benefiting the vast masses of low-income groups. If he succumbs to the powerful lobbies for aiming at larger and larger deficits, he will have to risk the political advantages which his party has gained by lower and lower rates of inflation. This is a hard choice for him, since his own natural propensities may be to push up the inflation rate. One hopes wiser counsels will prevail and the public will be spared the misery of rising inflation rates.

One consequence of not disturbing the drift of the price level of essential goods would be to project for reduced expenditure next year. The policy of austerity in public and private expenditure has to be introduced. The Prime Minister has referred to the informal emergency situation that exists now in the economy and has called for co-operation from various Opposition parties and others. All the more, it is necessary, that the entire financial policy of promotion of luxury consumption expenditure be reversed. This means that interest rates cannot be further lowered. The working classes as well as the older persons depending upon provident fund and small savings would be hurt some more if the Budget reduces interest rates further. The fiscal policy should be one of additional investment expenditure by means of more and more savings and less and less by means of augmented deficits.

Further, a policy of higher Customs and excise duties along with higher effective and nominal tax rates on incomes etc., the Finance Minister can help create the atmosphere of austerity in the country. But the lead has to come from the Prime Minister himself. It is he who has to give the clue to the Finance Minister.

Otherwise, the economy will be caught in the cross purposes of the gap between intentions at the highest level and effective policies at collateral level. Actually, the time is ripe to put the finances of Central and State governments on a fiscal emergency basis. Otherwise the growing fiscal and revenue deficits now at the State level will lead to an intolerable and uncontrollable situation in the country's finances.

The fiscal policy should be one of additional investment expenditure by means of more and more savings and less and less by means of augmented deficits.

Otherwise, the economy will be caught in the cross purposes of the gap between intentions at the highest level and effective policies at collateral level.

Actually, the time is ripe to put the finances of Central and State governments on a fiscal emergency basis. Otherwise the growing fiscal and revenue deficits now at the State level will lead to an intolerable and uncontrollable situation in the country's finances.

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