The Indian economy proved resilient during the global financial
crisis, partly as a result of aggressive measures to boost government
expenditures and cut taxes. These measures, which pushed the central
government deficit to nearly 7% of GDP and reversed the downward
trajectory of public debt, helped maintain robust growth during a
difficult period. Now that the recovery seems on track, it is time to
pay the piper and rein in the budget deficit.
Deficit
reduction poses a big challenge but also provides an opportunity to
reorder spending priorities in a way that will support future growth.
Indeed, there is much at stake in Finance Minister Pranab Mukherjee's
budget speech this week as it will set the tone not just for the fiscal
picture but also the contours of India's growth.
General government debt now stands at 82% of GDP according to
International Monetary Fund estimates, up three percentage points from
two years ago. High levels of deficits and debt increase the
vulnerability of public finances. The first order of business is
clearly to bring the deficit down to a more moderate level and to put
public debt back on a downward path. There are a few steps that will
help attain these goals and also serve to make progress towards
longer-term objectives.
On the expenditure side, there are a number of inefficient subsidies
that cost a lot of money and do not serve their intended purpose. For
instance, fuel subsidies ostensibly help the poor but most of the
benefits in fact go to middle- and high-income households. These
subsidies are costly and perpetuate a high level of dependence on fuel
imports. It would be far better, as a government commission recently
recommended, to cut these subsidies and replace these and other
subsidies with direct cash transfers to poor households. Overly
generous sops to public-sector employees also need to be reined in.
There are some important changes overdue on the revenue side, too.
Introduction of a goods and services tax, a far more efficient form of
taxation than the present central state tax and a hodgepodge of other
levies, would in fact raise revenues even if tax rates were kept at low
levels. By making the tax system more transparent, it could also reduce
opportunities for corruption by public officials.
Such steps are necessary to create room for the government to meet
the real priorities for its expenditures, including direly needed
spending on education, health care and most important of all,
infrastructure. While the government must play an important role in
catalyzing progress in these areas, an equally important objective is
to unleash the power of the private sector rather than just counting on
government to solve all problems.
On this front, the budget speech will be scanned carefully for signs
of the government's intentions. And here again there are opportunities
to attain multiple goals with some steps, many of which the government
had earlier indicated support for but that were set aside in the midst
of fending off the crisis.
Reducing government stakes in public-sector enterprises through a
process of disinvestment will help pay down some of the accumulated
public debt and create space for other expenditure priorities. The
government has already identified public-sector enterprises that are
ripe for disinvestment, could benefit from private management and for
which there is demand from private sector investors. It is important to
get a fair price for these assets but populist politics should not be
permitted to thwart these actions that are in the broader public
interest.
Mr. Mukherjee may also signal wider reforms. One key area to watch
is financial services, which will be crucial to sustaining and
deepening future growth. The Indian banking system held up remarkably
well during the global financial crisis but is near the limits of its
capacity to manage the financing needs of India's corporate sector.
Selling government stakes in many of the public-sector banks and
freeing up banks from strictures to buy government bonds and make
development loans would improve banking system efficiency and the
availability of funding for enterprises.
Development of broader financial markets, especially corporate bond
markets, has to be actively promoted if India is to finance the
physical infrastructure it desperately needs. Rather than trying to
clamp down on inflows of foreign capital attracted by India's growth
potential, these should be welcomed and steps taken to move forward
quickly with bond market development to absorb and effectively use
these inflows.
The measures in this year's budget will be about far more than just
mundane matters such as taxes and government expenditures. They have
the potential to determine India's growth prospects for many years to
come.
Comments