The fiscal consolidation roadmap laid out by the Vijay Kelkar Committee, primarily to reduce the fiscal deficit by cutting food and fuel subsidies drastically, will be a politically tough act for the government to follow. But we have it from Prime Minister Manmohan Singh himself that “reforms are an ongoing process,” and that the government will be able to handle the concerns of its allies, who fear the diesel hike and the cap on subsidised LPG cylinders at six a year will hurt the alliance’s poll prospects. The PM has said elections are far away: this might be an indication the government intends to initiate reforms that may be perceived as pro-poor by then. But it has yet to spell out details, and the perception remains that the reforms undertaken so far are primarily to attract foreign investors and boost stock markets.
Many of the steps suggested by the Kelkar Committee will require the already burdened lower, lower-middle and middle classes to make more sacrifices on the plea that things may be worse if such sacrifices are not made. Many of these solutions are not new, and it’s not as if the government hadn’t heard of them earlier. Unfortunately, though, the government’s political compulsions, mindset and lack of political will to touch the rich prevented it from taking some of these measures. Economist Prabhat Patnaik has noted that while the government complains of a lack of fiscal resources, it had still chosen to forego tax revenue amounting to `5 lakh crore a year through tax concessions to corporate entities and the rich in the past two or three Budgets.
On diesel, in fact, the government had gone a step ahead of the committee’s recommendation to hike the price by `4 per litre and raised it by `5. The committee’s stress on hiking cylinder prices gradually, raising the prices of rationed grain every time the minimum support price is hiked, and “rightsizing” Plan expenditure will put a burden on poorer people, though oil refiners claim 45 per cent of people use less than six cylinders annually, while 30 per cent use less than four cylinders a year. On cutting Plan expenditure, the fear is that the axe will fall first on social welfare, health and education schemes.
The committee is rightly worried that runaway fiscal deficits will spur the government to print more money to finance this deficit, which in turn will lead to high inflation and higher interest rates, hitting investments, growth and jobs. It might have been better though if the committee, which had such eminent members, had done some out-of-the-box thinking instead of sticking to the trodden path on how the government should cut expenditure and reduce the fiscal deficit.