Thursday, November 24, 2011

Deficit woes

http://economictimes.indiatimes.com/opinion/deficit-woes/articleshow/10864260.cms

Deficit woes

The finance ministry is required to explain to Parliament why its fiscal deficit is going off-target and what the government proposes to do about it, if the fiscal deficit overshoots 45% of the Budget estimate at the end of the second quarter of any year. The ceiling has been breached. However, the size of the fiscal deficit is less worrying than its composition. 

If the government is drawing on the public's savings to make efficient investment, it could well crowd in yet more investment by the private sector, rather than crowd it out, especially in an atmosphere of uncertainty that dampens the animal spirits of entrepreneurs. The global economy is fragile. Domestic confidence is low. Investment is what is required. 

So, the government's challenge is to slash wasteful consumption, ruthlessly prune subsidies and boost investment. Oil subsidies, now expected to be three times the budgeted Rs 23,000 crore, have always been a prime candidate for elimination. 

Now, fertiliser subsidies draw attention to themselves by soaring, reportedly, to Rs 95,000 crore, or more than 1% of GDP, driven, in part, by higher import costs. 

Writing on this page (ET, October 21), senior civil servant R Gopalakrishnan proposed a strokeof-pen reform: merge the fertiliser ministry into the agriculture ministry, so that there is no constituency arguing for a fertiliser subsidy for its own sake, divorced from the overall welfare of the farmer. 

Fertiliser subsidy can be weeded out, if the agriculture ministry bundles that measure with others that boost farm productivity and incomes, such as a higher support price, higher-yield varieties, investment in groundwater recharging, etc. 

Fertiliser is just one input cost for farmers. What matters is the farmers' earning, net of cost. The point is to focus on that, rather than on disparate subsidies that matter little to individual recipients but add up to a colossal diversion of investible resources in the hands of the government. 

There is no dearth of vital infrastructure projects that call for state funding: the Railways, urban public transport infrastructure, new towns, new major irrigation projects, all can absorb lots of investment. The point is to fund these, and not populist subsidies.

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