An exclusive focus on borrowing at the central government level, however, is too limited. In my view, the fiscal deficit, as it is currently defined, doesn’t make much sense. It only captures the Government of India’s borrowing requirement. What about the borrowing done by central public enterprises to finance their investments? What about the State Governments’ borrowings to finance their deficits? What about the huge borrowings done by some public entities at federal and state level (for example, state power distribution companies) to finance their losses? If one is really concerned about the macroeconomic effects of the fiscal deficit, one must consider all these sources of finance. Unfortunately, comprehensive and reliable data on borrowing by the wider public sector is currently lacking.
Another key issue is how the Government should manage its expenditures. The Government keeps on announcing public interventions, but are they being monitored and evaluated in an appropriate way? The Government has not yet developed a methodology for monitoring the inputs, activities, outputs and outcomes related to its spending programs and projects, or for analyzing the causal links between these various measures of spending performance.
What is needed is to develop a culture in which policymakers demand rigorous impact evaluations of the government’s spending policies and programs. Such studies would help policymakers analyze what works and under what conditions, draw appropriate lessons, and use these lessons to inform the future design and implementation of the Government’s spending policies and programs. Unfortunately, I don’t believe that the Government currently has the requisite knowledge and skills for undertaking studies of this kind. It urgently needs to develop this capacity.
It is important to note that the relationship between public spending and the macro-economic situation is not linear. Much depends on how public money is allocated and how efficiently and effectively it is used. Given this, the efforts that the Government of India makes to improve the management of its expenditures will pay huge dividends, and the country’s macro-economic situation will become much better.
Finally, may I urge the Department of Economic Affairs in the Ministry of Finance or the NITI Aayog or the Reserve Bank of India to start compiling data on the deficits of all public entities in India and come up with a credible estimate of India’s public sector deficit. These important data currently do not exist, but they are essential if we are to monitor overall fiscal trends and performance in India.
[1] An earlier version of this blog article appeared with the title “Is the fiscal deficit of 3.2% of GDP written in stone?”, in Business Standard, October 12, 2017.
[2] The writer is a former Professor of Economics at the Indian Institute of Management, Ahmedabad, India. Email: anand@EconomicManagement.com
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