Fiscal deficit could be reduced by cutting subsidy on food and domestic
Director of National Institute of Public Finance and Policy, Dr Rathin Roy said that there was urgent need for taking concrete steps to reduce the fiscal deficit to improve the economic condition of the country.
But it could be achieved by reducing state expenses under subsidy heads for food and domestic fuel besides increasing expenses in human development index, he added.
Dr Roy, while delivering a lecture organised here by Asian Development Research Institute(ADRI), said that there was a national consensus that India's combined fiscal deficit needed to be reduced significantly.
The question was how this laudable aspiration was to be achieved, he said adding that there were four important structural changes that have taken place over the last 10 years that will significantly impact our answers.
'States have always outperformed Centre in keeping its fiscal deficits low since 1981-82. Both states and the Centre have been running revenue deficits.It has been argued that this improvement in State Finances is significantly due to increases in central transfers but this is not true', he added.
'The Centre has for some time not been the locus for public investment, which is principally undertaken by the states. States (as per cent of GSDP) invest more than the Centre. The share of capital outlay in Central Plan has belen shrinking since 2000-01. Thus the 'heavy lifting' in terms of public investment is being done by states', Dr Roy maintained. MORE UNI KKS AKM SB NS2114 NNNN
'The opacity of the public service delivery mechanism makes advocacy for improving the efficacy of public spending difficult. It is easier and politically popular to argue that more should be spent even though all concerned are aware that this spending will not be effective', Dr Roy added.
'If government were to reduce spending on a fiscal 'Bad', like food subsidy, this reduction will, in large measure, be nullified by expenditure switching but, on current pattern, such expenditure switching will not bring about the desired development results', he observed.
'The share of physical savings in rising much faster in total household savings.With the Central Government borrowing to consume by running a persistant revenue deficit, domestic resources for investment are constrained', Dr Roy pointed out.
'If these emphatic measures in some combination are not implemented urgently then growth at or above 8 per cent can only be secured by tolerating higher (ultimately unsustainable) inflation and an increasing current account deficit. Piecemeal measures to enhance revenues or cut 'bad' public expenditure will not do the trick', he emphasised.
(Posted on 28-05-2014)