CLOSE on the heels of Reserve Bank of Indias (RBI) cautionary note that the government may not be able to peg fiscal deficit at the targeted 4.5 per cent of the GDP in the current financial year, finance minister P. Chidambaram has begun to talk tough on what needs to be done about the economy.
Echoing the RBIs fears, he admitted that the picture was not so rosy and that the government had been unable to contain the fiscal deficit to its targeted limits. The situation could be going beyond control. "The government is clearly under pressure and there have been possible slippages in fiscal correction," he said at the 30th Economic Editors Conference in the capital last week.
The RBI, in its annual report for 1996-97 released last week, said the governments expenditure was likely to exceed the budgeted amount, while revenue collection was likely to fall short of projections. It has also warned that large government borrowings and the use of oil bonds by oil companies to raise funds from the market could exert upward pressure on interest rates. Said the report: "If the Centre is not in a position to address its fiscal deficit and if it results in a disproportionate rise in market borrowing, the rate of interest on government paper will start rising, affecting the entire interest rate structure."
Chidambaram thinks that the government should devote all its attention to fiscal correctiona task it is not performing well. "It is still not inscribed in the political and economic leadership that fiscal correction is the single most important task before the government and the economy now," he said. And this, he felt, is primarily because there was no consensus in Parliament on key economic issues.
Chidambarams prescription revolves around four premises:
Chidambaram feels that the economic fundamentals are strong as a direct result of the post-1991 reforms. Thus, achieving a high GDP growth was not an impossible task, especially when in the preceding few years the economy had been growing at six to seven per cent. "The economy has reached a stage where it is quite possible to sustain a seven per cent growth." This, he said, was possible because reform measures like decontrol, deregulation, opening up of the external sector, injecting competition into the economy and using price as a mechanism in a manner that had never been done before had yielded excellent results.
Chidambarams most severe attack was reserved for subsidies. "The current subsidy levels are irrational and unsustainable," he said and called for a consensus in Parliament for a drastic reduction or even a removal of undeserved, unwarranted and unmerited subsidies to restore health to the economy: "Unless we target the subsidies properly, we wont be able to go ahead. " The spadework for this rationalisation of subsidies seems to have begun already. The finance ministry has released a paper on subsidies, which gauges the extent and rationale of subsidies as well as classifies them into merit or essential and non-merit subsidies or those which can be done away with. A political debate on their sustenance is expected to begin soon.
Growth, according to Chidambaram, should be the watchword and the government should brush aside whatever came in the way of the magic seven per cent number, "be it bureaucracy, institutions, laws or even superstition". He said "to boost growth, the government would not mind making a higher public investment in infrastructure, especially in the power sector even at the cost of a slightly higher fiscal deficit." This was necessary as infrastructureone of the governments primary concernshad not developed as expected. Private investment in this area had also not picked up.
But can Chidambaram implement his tough strategies, especially when Indias legal framework remains archaic? With this in mind, Chidambaram calls for radical legal reforms to suit current realities: "You cannot base the economic superstructure for the 21st century on laws two centuries old." And if the Parliament cares for the country, "it is absolutely necessary that five lawsIncome Tax Act (the working draft of which was released this week), Companies Act, Foreign Exchange Management Act and the Money Laundering Billbe passed by the end of 1997-98." It remains to be seen whether the government, in the absence of a consensus both in Parliament and within the ruling coalition itself, is able to give Chidambaram the strong support he needs, to do what he needs to do.
