A bluff to offset political cost

With the continuing effect of the global slowdown and an impending drought staring the Indian economy in the face, the Congress-led UPA government’s resolve to adopt austerity measures is, indeed, noble. But, a critical look at the actual cost cutting measures unveiled by the Finance Ministry reveals that it is more “cosmetic” in nature than “substantial” in the true sense.

The Finance Ministry has justified these measures saying the current fiscal situation and likely pressure on government resources arising out of insufficient rain in large parts of the country, there is need for further economy and rationalisation of expenditure.
Given the current fiscal situation, one can hardly dispute the government’s explanation. Faced with the daunting task of spurring demand in the economy,   the government has ventured into a reduced spending exercise to fund ongoing stimulus packages and massive investment on infrastructure.

A significant chunk of total expenditure, including Plan and Non-Plan, which is projected to touch an all-time high of Rs 10,20,838 crore in fiscal 2009-10, seeks to fund many popular flagship schemes in social sectors like rural development, job creation, education, housing, health, sanitation and drinking water supply.

Fiscal deficit

In the process, the overall fiscal deficit - the net difference between the government’s total income and expenditure - is targeted to touch an alarming  6.8 per cent of the Gross Domestic Product. Such a high level of fiscal deficit runs the risk of shattering the overall equilibrium of the economy. If the country finally comes under the spell of full-fledged drought, government’s expenditure will further balloon.

Against this grim economic scenario, the government unveiled austerity
measures, but only after Congress

President Sonia Gandhi prompted the government and its functionaries, including its MPs, to adopt austerity measures as an expression of solidarity with the drought-affected people. But the proposed austerity measures are unlikely to result in reduction in the overall Non-Plan expenditure. The main component of Non-Plan expenditure comprises primarily spending on subsidies on food, fertiliser and oil, salaries and pensions of government employees, interest payments, repayment of debt and defence expenditure.
Interestingly, the proposed austerity measures exclude all these heads of spending. A drastic reduction in these major heads of expenditure can truly bring down the overall Non-Plan expenditure.

Interest, subsidies high

For instance, the government proposes to spend a massive Rs 2,25,511 crore on interest payment in financial year 2009-10. Similarly, the expenditure on subsidies is set at Rs 1,11,276 crore this fiscal. The proposed expenditure on other major heads of Non-Plan expenditure is a mind boggling figure. But, given the political sensitivity of spending on all these major heads of Non-Plan expenditure, the government can hardly effect any cut in spending. The proposed saving the government hopes to make will be miniscule in nature.

Thus, many feel the measures like cutting down foreign and domestic travel of Ministers and government officials and a ban on holding official conferences in five-star hotels are populist in nature and aimed at sprucing up the government’s image among the gullible public.

In political circles, the Congress’ austerity drive is seen as a move to offset the
political cost of the drought ahead of the assembly polls in Maharashtra, Haryana and Arunachal Pradesh. Bihar and Jharkhand also go to the polls soon.   
Considering the routine nature of such spending cuts to tighten the grip on overall expenditure, the current austerity moves do not appear to be a serious attempt to curb waste.

Instead, the move has set off a controversy, much to the embarrassment of the Congress. The row, in fact, was triggered when Finance Minister Pranab Mukherjee requested the External Affairs Minister S M Krishna and his deputy Sashi Tharoor to vacate their accommodation in star hotels. Though Krishna and Tharoor have maintained that they were footing bills on their own, the “ostentatious” lifestyle of some of its ministers has left the Congress red-faced.