Ballooning government debt needs to be watched
Though the finance ministry and the central bank have traditionally been on opposite sides of the interest rate debate, there can be little doubt fiscal policy needs to create more space for monetary policy to operate. If government expenditure keeps on rising unchecked, as it did till P Chidambaram returned to North Block, this will fuel inflation. And if corporate investments are to grow as expected, higher fiscal deficits will keep interest rates high.
The finance ministry has traditionally been seen as the centre of all major economic reforms since 1991, and this time around won’t be different. Whether it is ending the ‘tax terrorism’ that has got investors spooked or ensuring states get a better deal—during the UPA years, BJP chief ministers were at the forefront of the fight against ‘tied aid’ of the Centre—the finance ministry will be at the centre of all the action.
How the ministry deals with curtailing expenditure will be the most important—in the immediate short run, BJP’s reigning economic guru Arvind Panagariya has said a higher deficit can be tolerated. Over the medium-term, however, getting the fisc on track is critical. This means dealing with the issue of burgeoning subsidies, from 1.5% of GDP during the NDA years to 2.5% today; whether this means using Aadhaar-based cash transfers remains to be seen. An assertive finance ministry needs to restrict the role of FCI—its extra procurement costs R60,000 crore each year. Continuing with the 50 paise diesel price hike, and hiking LPG prices by R100—still leaving a R350 subsidy per cylinder—will save around R46,000 crore, around half of which is borne by oil PSUs. Runaway expenditure has resulted in huge borrowings, as a result of which, the government will spend 38.2% of expenditure on debt servicing in FY15—this was a much lower 30.4% in just FY13. Arun Jaitley has his task more than cut out for him—more so since, as this newspaper has pointed out before, his predecessor has left him with R1 lakh crore of unpaid bills on food, fertiliser and oil subsidies.