Policymaking on the basis of a sound economic rationale, overriding practical political realities and social concerns, would be particularly difficult in an election season. The controversy that has broken out over the Finance Ministry’s proposal to slash budgetary support for social sector schemes and the opposition that it is generating from within the government and the coalition exemplifies the problem. The Finance Ministry’s hand is forced by the need to keep the fiscal deficit under check in an environment of slowing economic growth, low tax revenues and rising subsidies. About three-quarters of the budgeted fiscal deficit for the whole of 2013-14 was already reached in the April-August period, which means that the Finance Ministry has little choice but to go for “savage” cuts in the remaining months of this fiscal year. Falling tax revenue growth — direct tax collections grew by 11.58 per cent in the April-October period as against the targeted 19 per cent — leaves the government little room for manoeuvre. A breach of the fiscal deficit target will most likely attract a downgrade of the country’s sovereign rating, which will push up borrowing costs for Indian companies abroad and put off prospective foreign investors.
The across-the-board cut in expenditure has obviously affected flagship welfare schemes of the UPA such as the Mahatma Gandhi National Rural Employment Guarantee Scheme and the Indira Awas Yojana, sparking protests from within the government. Rural Development Minister Jairam Ramesh has asked what is so “sacrosanct” about the fiscal deficit target. A close look at the numbers, however, shows that the Rs.2,000-crore cut in allocation to MGNREGS, for instance, accounts for just over 6 per cent of the budget allocation of Rs.33,000 crore for 2013-14. Second, the general elections will be a vote on the performance of the government over its entire term, not just on what happens in the final six months. Still, the pressure on Finance Minister P. Chidambaram to loosen the purse strings will be tremendous. Mr. Chidambaram will have to balance between pleasing fellow ministers and partymen and ensuring that there is no harm caused to the economy in the process. This is easier said than done in the current environment when most, if not all, the economic indicators are flashing red. In the short run, there are only two ways of freeing up resources to increase welfare spending. Prune subsidies further on petroleum products such as diesel and cooking gas and push hard to increase non-tax revenues from disinvestment and the sale of spectrum. If the first will alienate urban voters, the second might not yield substantial amounts in the present environment. Clearly, there is a lot of tightrope walking to be done in the months ahead.