Finance minister Arun Jaitley is picking up encomiums from all quarters, including those in the UPA such as C Rangarajan and Montek Singh Ahluwalia, for sticking to the fiscal deficit target of 3.5 per cent of the GDP for 2016-17. One wonders why.
If growth and employment are really a priority, he could have targeted a fiscal deficit of closer to 4 per cent of GDP. Fiscal hawks, including, curiously enough, members of the Seventh pay panel, sidestep the politics of squeezing expenditure and raising revenues — that it hurts the poor and voiceless. Hence, it is easier to pare MGNREGA or Sarva Shiksha Abhiyan funds than perceived entitlements under the Pay Commission, and raise funds through regressive indirect rather than direct taxes.
Recent attempts to rein in MGNREGA funds and contain rural wages have hurt the economy — since the benefit of lower wage costs has been offset by falling demand. Adhering to a range-bound target, as suggested by the finance minister, is fine for the medium-term, provided there is clarity on raising the tax-to-GDP ratio by at least 4-5 percentage points through direct taxes. India’s human development indicators are an embarrassment; its level of government spending at 27 per cent of the GDP is lower than levels in Brics countries.
Fiscal hawks, or ‘deficit scolds’ as Paul Krugman calls them, feel that higher government spending crowds out the private sector by pushing up the interest rate. Underlying this, of course, is an ideological assumption — that government is a poor economic agent. As for public spending raising the interest cost — that is not relevant when private investment is not happening. In the medium term, public spending can lead to higher incomes, tax revenues, savings and consumption — offsetting the initial effect on interest rates. But fiscal hawks fear the wrath of the rating agencies more than that of the poor and the jobless.
A Srinivas, Senior Deputy Editor
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