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India's fiscal deficit, says the IMF, cannot be sustained at the current high level without a heavy cost to its long-term economic prospects. The proposition will be accepted without demur. The question is the time frame in which the fiscal deficit can be brought down. P Chidambaram targeted its reduction from 5 per cent to 4.5 per cent of the GDP in 1997-98. He confronted his successor with a fiscal deficit of 6 per cent. Even though revenue expenditure was somewhat below that estimated by Chidambaram, the fiscal deficit was bloated by a sharp fall in (import and excise) tax collections. Worse, GDP growth slowed down by more than two percentage points to 5.1 per cent last year. This is the spectre that haunts Yashwant Sinha, who has proposed a modest decline in the fiscal deficit to 5.6 per cent of GDP, on the assumption that the GDP will grow by at least 6 per cent in 1998-99.
Sinha, however, may not be able to contain the fiscal deficit as targeted. The IMF's skepticism in this regard will be widelyshared. Sinha's liberal rollbacks may push up the fiscal deficit to close to 6 per cent of the GDP. The question is whether the IMF considers Sinha's target good enough (in the short term), since it is in support of growth in capital expenditure, considered necessary to reverse the recessionary tide. If industrial growth revives, excise- and import-tax collections will bounce. But the IMF is against orienting the fiscal and monetary policies towards supporting domestic demand. So it not only frowns on rollbacks, but also on increasing public investment. It wants the fiscal deficit to be squeezed, rapidly. This is a sure prescription for pushing the economy into a tail-spin and deepening fiscal instability. The IMF is also against administrative measures to ward off pressures on the exchange rate: no curbs on forward contracts, no more acceleration of repatriation of export proceeds, no tampering with CRR. The Reserve Bank should use only one instrument: raise interest rates to deflate demand, imports andinvestment.
The IMF's extreme stance only serves to intimidate liberalisers who have to contend with economic vulnerability, contributed by sharp fluctuations in agricultural output and aggregate demand. Fortunately, India cannot be forced to act under duress. Its indebtedness to the IMF is on a steady decline. Large private transfers (inward) as also rising net foreign investment give strength to the external account. But the country's policy- makers must set their sights, firmly decline compromises in fiscal discipline, hold lobby pressures at bay, and get the private sector to push for growth.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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