The Indian Budget 1996-97 The Indian Economy Overview

ECONOMIC SURVEY OF INDIA 1995-96 - UPDATE


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SOME ISSUES AND PRIORITIES


The Fiscal Challenge

  1. The economic reforms of the past five years have brought about a strong recovery in the growth of production and employment, restored the health of our external sector and ushered in far-reaching changes in agriculture, industry, the financial sector, capital markets and the tax structure. But a great deal more remains to be done. The Economic Survey, 1995-96 and its two predecessors have clearly outlined the issues and policy priorities confronting the Indian economy. In this brief Update the key challenges and issues are reemphasized.

  2. The central challenge facing the government is how to contain the net borrowing requirements of the Central Government, in other words, the fiscal deficit. Past experience has driven home the perils of a high fiscal deficit. Basically, the government's net borrowing requirements (that is, the excess of its expenditures, including net lending, over its non-debt receipts) can be financed from three broad sources:

  3. Excess borrowing from any of these sources leads to serious economic problems. Too much borrowing from RBI leads to excessive growth of money supply which, in turn, induces high inflation and downward pressure on foreign exchange reserves and the rupee's exchange rate. Too much borrowing from non-RBI domestic sources drives up interest rates and soaks up investible funds which would have otherwise financed production and investment in industry, agriculture, infrastructure and other sectors; thus growth of output and employment are reduced. Too much borrowing from foreign sources adds to external indebtedness and heightens the risk of the kind of external payments problem which plunged the economy into crisis in 1991. Furthermore, excessive borrowing from all sources, taken together, leads to rising interest payments on government's liabilities, reduces spending available for priority social and infrastructure programmes and feeds the need for higher levels of borrowing in future.

  4. The rising interest burden could reach an unsustainable level unless efforts are made to contain it through reduction of the fiscal deficit and retirement of a part of the debt. As a proportion of the revenue receipts, interest payments rose from 39 per cent in 1990-91 to 47 per cent in 1995-96. The high growth of revenue expenditure also throws up another challenge. Less money is available for capital expenditure or investment. While the share of revenue expenditure in total Central Government expenditure has increased from 69.8 per cent in 1990-91 to 78.4 per cent in 1995-96, that of capital expenditure has fallen from 30.2 per cent to 21.6 per cent.

  5. In every economy there will be subsidies, some visible, some hidden. This will be particularly so in a country where there are a large number of poor people and some goods and services flowing to the poor have to be subsidised. Nevertheless, subsidies must be closely targeted, periodically scrutinised and kept under tight control. The level of major subsidies (mostly in food and fertilizers) increased from Rs.9793 crores in 1991-92 to Rs.12,550 crores in 1995-96.

  6. Quite clearly, if we are to successfully pursue the goals of high economic growth, social justice, self-reliance and price stability then every effort must be made to contain the government's fiscal deficit to manageable levels. This essentially involves: raising current revenues through good tax policies, appropriate user charges for services provided by government and public agencies and adequate dividends from government equity in public enterprises; a transparent and well-designed programme of public sector disinvestment; and tight curbs on growth of non-essential or low-priority government expenditures. If we cannot do this we cannot aspire to high growth of employment, quick reduction of poverty, low inflation and a viable external sector.

  7. Measures to contain and reduce the fiscal deficit will also promote public savings and, hence, overall domestic savings necessary to sustain high levels of national investment and growth. As the Economic Survey 1995-96 has pointed out "our private saving rates have been comparable to those of high performing East Asian economies. But our record of public savings has been much poorer and needs to be drastically improved." Basically, this involves reduction in revenue deficits of Central and State governments and much better financial performance of public sector enterprises which have been built with huge amounts of public investment.
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