A dividend payment of Rs. 66,000-crore from the Reserve Bank of India, the highest in its 80-year history, helped tip India’s fiscal balance to surplus in August. A combination of the pick-up in the Centre’s revenue receipts and its declining expenditures, especially on subsidies, helped keep the fiscal deficit during the first five months of the current financial year under Rs. 3.7 lakh crore, lower than the Rs. 3.97 lakh crore during the corresponding period last year. The Central government’s unfailing commitment to fiscal consolidation is conducive to macroeconomic stability. But sticking to the road map for fiscal consolidation isn’t easy: expenditure and tax reforms can be tricky politically. In its budget for this year, the Narendra Modi government had shifted India’s fiscal consolidation road map by raising the fiscal deficit target for the year to 3.9 per cent from 3.6 per cent earlier. By doing so it created fiscal room for Rs. 70,000 crore of public investments, which it hopes would kick-start the jobs-generating infrastructure sector. Earlier governments too postponed targets. The fiscal deficit reduction targets that were originally a part of the Fiscal Responsibility and Budget Management (FRBM) Bill, 2000 were eliminated from the Act that Parliament passed in 2003; the annual numerical targets were left to the government to formulate in the FRBM Rules. Since then, the road map has been halted four times — in 2005-06, 2008-09, 2012-13 and 2015-16. And so the resolve that the Union Finance Secretary expressed at a media conference last week — that though the government expects a shortfall in tax revenues this year it won’t deviate from the 3.9 per cent fiscal deficit target — is welcome.
With inflation now under 4 per cent, interest rate cuts adding up to 125 basis points in the past 12 months, and the Centre and the States going all out to revive stalled projects and improve the ease of doing business, India remains well-poised on the path to economic recovery. Fiscal credibility, important as it is to macroeconomic management, will make it possible to sustain India’s current growth rate and to convert potential into actual growth. The focus will be on the budget-makers’ tricks of funding subsidies through non-transparent, off-budget borrowings or higher taxes on fuel and so on. The Finance Minister has undertaken to clean up the clutter of tax incentives for the corporate sector to plug revenue leakages, in order to set the stage for lower tax rates. He is bound to find the business lobbies less enthusiastic about giving up sops, and must resist pleas for their retention. He will have to be insusceptible too to excuses for delaying even further the urea prices de-control and other such expenditure-side reforms. On the road to fiscal correction, Finance Ministers walk, and are judged, alone.
