Focussing on fiscal consolidation

February 21, 2010 11:51 pm | Updated November 17, 2021 07:16 am IST

The Prime Minister's Economic Advisory Council's Review of the Economy 2009-10, coming as it does just a few days before the Union Budget, is particularly significant this year. The EAC has brought up to date the major macroeconomic trends, a task that will be carried forward by the Economic Survey and the budget. While sharing its growing optimism with other official as well as non-official agencies , the EAC has entered certain caveats. Significantly, in projecting the economic growth, it has sharply revised upwards its October forecast of 6.5 per cent, pegging the rate at 7.2 per cent with an upward bias and thereby endorsing the CSO's advance estimates. The EAC is not alone in marking up the growth forecasts since the beginning of the year. The Reserve Bank of India, in its review of the third quarter, had estimated a growth rate of 7.5 per cent, sharply higher than its own earlier forecast of 6 per cent. The mid-year Economic Survey had said that the economy will grow by 7.75 per cent. Even if the optimism is justified and the economy actually grows at around 7.5 per cent, it would still be below the 9 per cent-plus growth recorded in the three years beginning 2005-06. It is, however, clear the economy is surely on its way back to a higher trajectory. The EAC expects the economic growth to touch 8.2 per cent in 2010-11 and 9 per cent the next year.

The two principal worries are inflation and the “unsustainable” fiscal situation. While concurring with the RBI's projection of 8.5 per cent WPI inflation, the EAC assesses that the high food inflation now hovering over 18 per cent could spill over to other sectors if corrective steps are not taken immediately. They include timely release of food grains for the public distribution system and import of essential commodities that are in short supply. Holding that the large revenue and fiscal deficits recorded over the last two years cannot be allowed to continue despite their proven counter-cyclical effects, the EAC wants the fiscal consolidation to be attempted without in any way affecting the stimulus aspect. With adequate fiscal adjustment, it would not be difficult to reduce the Centre's fiscal deficit by one to 1.5 per cent of the GDP in 2010-11. Disinvestment and spectrum auctions will boost revenues by 0.8 per cent. There is little scope for compressing capital expenditure while effecting fiscal correction. Infrastructure spending remains critical. Correctives must focus more on expenditure management since much of the fiscal expansion is attributable to increases in expenditure rather than tax cuts.

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