The government’s finances are in a mess. But its gravity has not really sunk in. Prime Minister Manmohan Singh expressed serious concern on fiscal stability in his New Year address. Finance Minister Pranab Mukherjee recently said he is getting sleepless nights thinking of subsidies and deficits. But politics has held back both leaders, and the entire Congress, from taking even small steps to deregulate diesel prices. High global crude oil prices have increased the subsidy outgo for the year by Rs 1 lakh crore. With a mitigation of the eurozone crisis and a pick-up in the US economy, crude oil prices are only expected to sustain their current high price levels. So, the subsidy burden will rise dramatically next year.
The Prime Minister’s Economic Advisory Council, chaired by C. Rangarajan, sounded the latest alarm on the government’s worsening finances. Not only does it expect the Centre to slip in meeting its fiscal deficit target for 2011-12, the council also foresees difficult times ahead. Privately, some of its members exchanged notes with the PMO and the Planning Commission about the deterioration of the government’s financial health, much before the EAC released its review of the economy for 2011-12 on Wednesday. It will be foolish to think economic ministers do not know what to do, but all await a political green signal. Politicians still do not reckon that high fiscal deficits will put pressure on interest rates besides leaving little resources for the private sector. This, in turn, can slow down growth and mar the job prospects of millions entering the labour market every year. Surely, this will not happen overnight but the economic situation may get really nasty when they face general elections again in the first half of 2014.
The recipe is clear — set a deadline for completely deregulating prices of diesel and other petroleum products in a phased manner, withdraw the fiscal stimulus imparted in the aftermath of the 2008 global meltdown and pursue policy reforms vigorously. Of course, action on subsidies requires support from allies. The Congress, that leads the UPA, must start building consensus, because fiscal stability is the backbone of economic security. India could hold its head high post-1991 only because it managed its fiscal resources well. It must get back to the path of prudence by putting in place a credible medium-term fiscal consolidation programme. Mukherjee has exactly three weeks to do this.
