As a part of the lecture series program at Institute of Management, Nirma University, the students had an enriching session delivered by Dr. M Govinda Rao, Member – Economic Advisory Council to the Prime Minister. He was present to deliver a lecture on the topic “ Global Economic Crisis and Counter – Cyclical Fiscal Policy in India”.
He started by explaining to the audience what fiscal deficit is all about and how it is the amount of total money borrowed from various types of markets. 35-40% of total revenues go into the paying of interest over the fiscal borrowings implying that there is less money which is available for development. High crude oil prices and rise in subsidies and transfers have increased the fiscal imbalances sharply after 2008-2009. Although the recovery started within two quarters of the Global financial crisis, both unhealthy international environment and domestic difficulties have resulted in proliferation of subsidies and transfers leading to large twin deficits i.e fiscal deficit and current account deficit. It was also said that India is in a vulnerable zone and reforms are imperative.
He emphasized how poverty is one of the biggest challenges India is facing today. To deal with it government should empower the poor with skills such that they can start living independently and government can then curb doling out large subsidies.
The fiscal stimulus was introduced much before the Lehman episode which helped the country recover very fast. The stimulus was mostly irreversible and of consumption type, and not of investment type. At present (2011-2012) the fiscal deficit stands at 8.1%. Higher levels of fiscal deficit at state level are mostly due to free electricity to farmers and unrevised tariffs.
Fiscal adjustment targets have now been set up to get back on track. Debt – GDP ratio is to be contained at 68%, fiscal deficit should not exceed 3% , disinvestment 1% and capital expenditure 4.5% by 2014-2015.
The reform agenda requires the country to increase revenues, introduction of GST, DTC and tax administration reforms. We need to have a speedy disposal mechanism to reduce tax arrears in IT which stands at Rs 2 billion. We also need to come up with a proper auctioning system to allocate scarce resources and reform the budgeting system so as to ensure competitiveness, transparency and accountability.
Dr Rao ended the lecture by reiterating that the fiscal situation is precarious and is as bad as it was in 2001-2002. There is no getting away from levying more taxes. He mentioned that one of the most important steps that need to be implemented with immediate effect was to raise the Diesel prices by at least Rs.5 which would send a clear signal to foreign investors that we are looking forward to reforms and also to increase our supply of coal by 10%. He concluded by stating that the problem we are facing is that of policy reversals rather than policy paralysis.
(Content courtesy: Kashyap Rao, Photo courtesy: Pratikriti)