Recent news reports suggest that the new Congress-led government is likely to underscore economic growth and policies improving conditions for the poor as opposed to fiscal prudence.
Essentially, this was the resounding sentiment echoed in the President Pratibha Patil’s speech to the Parliament Thursday. Jump-starting economic growth while assisting the millions of underprivileged and poor, backed by large-scale use of social programmes was the thrust of the government policy this year. Amid this setting, fiscal prudence is expected to play a secondary role to the aforementioned policies. However, analysts are eyeing how the new government will reduce the decade-high fiscal deficit that compromises private investment and augments interest rates – this is likely to be a vexation for the central bank in India. New Delhi-based Institute of Economic Growth (IEG) economist, N.R. Bhanumurthy, said in a statement, “She (Patil) was definitely talking about growth with a human face. She has also admitted that we are losing some control on the fiscal side.” He added, “They (the government) have realised that getting back to fiscal discipline will be tough this year.”
The bond market has been shaken on borrowing woes by the government to support the fiscal deficit. This is also giving rise to rate expectations in the long run, while prodding the yield curve to its steepest in ten years. Ahead of the election, the interim budget for February made an attempt to contain the fiscal deficit to approximately 5.5% of the GDP (gross domestic product) for the fiscal year ending March 2010.
Despite the good intentions, analysts warn that slow-moving tax receipts in the wake of the global recession along with higher spending for schemes assisting the poor could translate into a deficit closer to 6.5%.