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Is reining in fiscal deficit critical for the macro economic health of the nation? The issue is almost akin to that of a family spending more than it earns, month after month, and year after year. Perhaps the only difference is that the fiscal profligacy of the government does not necessarily result in bankruptcy. Governments can simply print money to support their overspending. However, nations have now become aware that printing money to meet deficits invariably lead to massive inflation. Therefore, governments issue bonds to bridge the fiscal gap. But the entry of a giant-sized borrower into the debt market, leads to three negative fall-outs.

First, the interest rate in the market place begins to spike. And this directly hurts investment and capital formation. It also deters those who borrow from banks to purchase white goods, automobiles, or even seek student loans. Second, equally important is what economists’ call “crowding out private investments”. The very same rupee which could have earned much higher returns in the hands of a private entrepreneur, ends up offering low returns, if at all any, in the hands of the government.

Third, evidence suggests that much of the extra spending of the government goes into financing salaries, interests, and subsidies. These further lead to pressure on prices and breed inefficiencies. With rising global food prices, rising global oil prices, and rising prices of almost all commodities induding iron ore, copper and aluminum, it is critical to guard against fuelling price rise due to the impact of fiscal deficit.

In order to restrain the government from fiscal profligacy, the Fiscal Responsibility and Budget Management Act (FRBM) was passed in 2003. This Act required that the fiscal deficit be brought down to 3% of GDP by 2008-09. Fortuitously, we are nearing this target already.

However, the target for revenue deficit the excess outlay on government’s day-today operational expenses - is slipping. We were to reach zero revenue deficits by the year 2008-09, as per the PRBM Act. But, we will still be at 1.54% by the end of this fiscal. In other words, zero revenue deficit, unfortunately, is still eluding us.

What are we to make of this control over fiscal deficit on the one hand, and inability to rein in revenue deficit, on the other?

There-is something seriously amiss. What is getting squeezed in the bargain is capital expenditure for infrastructure - physical and social. In fact, such productive expenditure has fallen from 3% of GDP in 2002-03 to 1.81 % in 2006-07. During this fiscal, we may see a slight improvement, though the fears continue to lurk on this account.

Unfortunately, the picture on the subsidy front is not comforting. The quantum of subsidies have risen from Rs 43,533 crore in 2002-03 to Rs 53,463 crore in 2006-07.

What is more troubling is the fact that in addition to these ‘explicit subsidies’, there is a massive hidden subsidy, euphemistically called ‘implicit subsidy’.

These extra budgetary transactions in the form of bonds issued to oil companies’ fertilizer companies and the Food Corporation of India amounted to 1 % of our GDP in2006-07.

The bonds issued to oil companies alone amounted to Rs 24,100 crore in 2006-07 and those to Food Corporation amounted to Rs 16,200 crore. Neither of these two large expenditures appears in the ‘Budget at a Glance’. We believe that this year, the government has envisaged an ‘implicit subsidy’ of Rs 30,900 crore for the oil and fertilizer sectors.

In conclusion, fiscal deficit must remain under control and FM deserves kudos on this account. But, in this budget he must rein in the revenue deficit, bring back the focus on capital formation and address ‘implicit subsidies’ head-on.