Experts give their thumbs down to govt's austerity steps

Disagreeing to the move taken by the finance ministry to ban creating new government jobs in the current fiscal and buying new government vehicles, Pronab Sen, country director, IGC India-Central and former principal adviser, Planning Commission says the move is unlikely to benefit anyone to a great extent, but its negative impact can be massive.

Speaking to CNBC-TV18, he says the reduction of Rs 50,000 crore from the budget cannot happen unless there is a cut in subsidy expenditure which is unlikely. "If the government refuses to pay the oil companies, Food Bill or the fertilizer subsidies, then you will have a whole bunch of companies who will bleed and that would be extremely negative for the economy,” he adds. Echoing Sen's comments, S Narayan, former Finance Secretary says that the increase in planned expenditure last year was fairly modest. If due to the delay in projects that is not be realised, then capital formation from the government's side is actually coming under stress which may hurt growth. Below is the edited transcript of the discussion on CNBC-TV18 Q: What are your thoughts on the austerity measures that have been announced and the impact because that could be almost to the tune of Rs 50000 crore which is 10 percent cut on about Rs 5 lakh crore? Narayan: Every time the government is in fiscal difficulty it has announced something like this – revenue expenditure cut. If you look at it carefully, I wonder where the subsidy cost is coming. If the subsidies cost are coming out of the revenue expenditure budget and the government is saying that I am going to cut subsidies that will only mean that either the unpaid subsidies will just get carried over to the next year in which case it is not an expenditure cut at all or the oil companies or fertilizer companies who are about to get the subsidies they will be bleeding. Therefore, I wonder whether quite a substantial portion of Rs 50000 crore might actually end up as unpaid subsidies which is fairly serious and is not really fiscal compression, but only postponement of expenditure. So, I am not clear what exactly are they going to do about this. Secondly, all the announcement regarding economy class travel, companion free adds barely Rs 1000-5000 crore and that is much more cosmetic than anything else. I don’t know whether fundamental expenditures will get cut or will it keep them going. Q: The government has clearly said 10 percent cut in some categories of non-planed revenue expenditure excludes the six heads of defence, salaries, pensions and grants to states, how would you read this? Sen: The point that was made just now is the real one because after that what is really left is subsidy. Of the Rs 5 lakh crore, government expenditures are somewhat minor component. The Rs 50,000 crore reduction from the budget as compared to what it would be given, the depreciation and the hardening oil prices – you are talking about a huge compression in subsidies and there is no other way it can happen. If the government just refuses to pay the oil companies or Food Bill or the fertilizer subsidies then you will have a whole bunch of companies who will bleed and that would be extremely negative for the economy. It is not going to help anyone to a great extent but its negative impact can be massive. Q: Finance ministry is committed to the 4.8 percent fiscal deficit number and will all of this ensure that we get 4.8 percent? Sen: Yes, but for that they will have to touch the planned expenditure. I cannot see them achieving that target simply but they could if they really take the bit between their teeth. They could do it through non-planned, but I don’t see how without touching the planned they will be able to achieve that. Q: Can you (Narayan) elaborate the point that you made earlier? Narayan: If you look at the budget, the increase of planned expenditure which was envisaged last year was fairly modest. If due to the delay in projects that will not be realized or there is going to be a cut in planned expenditure then capital formation from the government's side is actually coming under stress. This means you will hurt growth. You may not be hurting growth now but you will be hurting it in future. So, I wonder if it is purely election ploy to say okay let us do the dandies now and see what happens next year kind of an argument which is very short sighted.