The pundits on TV made a big deal about the stock market going up on budget day- by about two hundred points. The market had gone actually declined in the run-up to the budget and, even otherwise, movements one way or another on budget day are of no great significance when the Indian market is so closely linked to global market trends.
The big item for the market was said to be fiscal consolidation. The pundits said this had compensated for 'big ticket' reform. Other than Manmohan Singh's first budget, there has been hardly any budget that measured up on this count, so you have to wonder what it is that pundits dream about. Leaving that aside, what do we make of the achievement on fiscal consolidation in Mukherjee's latest budget?
He has budgeted a fiscal deficit down of 5.5% in 2010-11, below the 7.9% and 6.9% of the two preceding years. Some of this is automatic- the pay commission arrears don't apply, farm loan waiver has got pruned. Then, there is the disinvestment effect and the sale of 3-G spectrum, some cutting of subsidies. But, the figure of 5.5% is lower than the Thirteenth Finance Commission's recommendation of 5.7%. Besides, nominal growth for 2000-10 will be higher than the budgeted 10.2% because of higher inflation, so the fiscal deficit will be lower than 6.9% and the deficit for 2010-11 will be even lower than 5.5%.
Is this appropriate when government needs to spend a lot more- on railways, roads, education, health care, irrigation, etc? We need to factor in rising government expenditure and we need to push for a higher tax/GDP ratio- we have just edged past 10%, which is lower than even the 12% we had in 2008-09. We need agriculture to grow at 4% if growth is to be truly inclusive.
Alas, there seems to be a sense that if get to growth of 9% and we meet FRBM targets, we have reached heaven. Not at all, we need 9% growth that is sustainable and inclusive- and these conditions will be met only when agricultural growth is boosted and when we spent a lot more on the social sector. Fiscal consolidation should not be confused with fiscal fundamentalism.