Finance Minister Pranab Mukherjee has stated that his government is unambiguously committed to restoring growth and employment but it would also strive for fiscal consolidation over the next two to three years. These two macroeconomic goals are not antithetical to each other. The government needs to spend more to stimulate the economy, for which it will have to borrow additional money. A higher GDP growth rate will arrest the decline seen recently in tax revenue, both direct and indirect. As RBI Governor D. Subbarao has pointed out, economic recovery can be sustained only by practising financial rectitude. The forthcoming budget for 2009-10 should provide the lead by drawing up a time-table for fiscal consolidation, while simultaneously laying out large sums for infrastructure development and social welfare programmes. Managing the trade-off between short-term compulsions and long-term sustainability will be one of the important challenges before the government. According to the Finance Minister, additional stimulus measures will be decided after the government completes its assessment of the impact the three stimulus packages and the interim budget have had.

The stimulus packages have largely been in the nature of monetary intervention. Although since September last year, the RBI has signalled lower interest rates, there is considerable scope for banks to lower the cost of credit and lend more. Monetary and fiscal policies will necessarily have to go hand in hand. The interim budget had clearly pointed to a deterioration in the health of public finance. For 2008-09, the revenue and fiscal deficits estimated at 4.4 per cent and 6 per cent of the GDP are sharply higher than the budgeted one per cent and 2.5 per cent respectively. The consolidated fiscal deficit of the Centre and the States including the off-budget items is estimated at over 11 per cent of the GDP. While the presence of excess capacities in many sectors would help in containing inflationary pressures, the growing fiscal deficit will increase the already large government borrowing and militate against the softening of interest rates. The government will have to fine-tune its machinery for evaluating public expenditure programmes. That would include, among others, specific steps to ensure greater accountability, efficient targeting, weeding out of wasteful expenditure, and constant monitoring. These are not new goals but they assume a special significance at a time when the public policy goals for the short-term vary sharply from those for the medium-term.