BackDe-jargoned: Fiscal prudence
The term is used to indicate a government's management of its finances
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Stock markets in India climbed to new heights on Wednesday, 2 July, as expectations began to rise before the new government presents its first budget on 10 July. Arguably, the rally was triggered by finance minister Arun Jaitley’s comments at an event in New Delhi, where he argued in favour of fiscal prudence.
What is fiscal prudence?
The term is used to indicate a government’s management of its finances—whether it is managing well or not. Being prudent would mean that the government is serious about its finances and does not indulge in populist spending by running a high deficit. Over the years, government of India has run higher levels of deficit, which has created numerous problems for the economy. Higher government spending gave boost to demand, which created inflationary pressure in the economy. High inflation pushed the central bank to raise interest rates, which affected investment and growth.
On the other hand, higher borrowing by the government pushed demand for funds in the bond market, which again pushed up the cost of money, leading to higher interest rates.
Therefore, it is important to maintain discipline in the management of government finances. If the government spends way beyond its means for long, among other things, it increases the debt burden and, over time, bigger portions of tax revenues have to be devoted towards debt servicing. For example, the central government is spending more than 40% of the tax revenue receipts on interest payments. If the outgo on interest payments were lower, it would have been in a position to dedicate more funds towards developmental expenditure, such as building infrastructure.
Though the government has made some progress in bringing discipline in the past few years, there is still much ground left to be covered. The fiscal deficit has come down from the level of 6.4% of the gross domestic product (GDP) in 2009-10 to 4.6% of the GDP in 2013-14.
The challenge
The interim budget, which was presented in February by the outgoing United Progressive Alliance government, had pegged the fiscal deficit target at 4.1% of GDP for the current financial year. However, it is being widely argued that it will be extremely difficult to meet the revenue and expenditure targets set in the interim budget.
Things will also get complicated because a fair amount of expenditure has been rolled over from the previous year to the current year. Therefore, markets will expect the new finance minister to present a more realistic picture, even if doing so leads to revising the deficit target set in the interim budget.
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