ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Wages of Over-Optimism

ECONOMIC AND POLITICAL WEEKLY Wages of Over-Optimism The mid-year review of the economy that the government tabled in parliament earlier this week provides a fair and honest assessment of the state of the economy. The economy looks in better shape than it did a few months ago when the 2004 monsoon turned out to be erratic in its behaviour. The disappointment over the kharif crop is likely to be compensated by a large rabi harvest. Industrial growth is running at over 8 per cent and exports are expanding at more than 20 per cent. It now seems reasonably certain that the economy will grow by 6 to 6.5 per cent; and by closer to the top end of the range. This is no small achievement since it will follow a year when growth exceeded 8 per cent. The only area that remains cause for concern is the simmering rate of inflation. Prices may no longer be rising as sharply as they did in August and September, but the current 7 per cent annual inflation rate, on a point-to-point basis, in wholesale prices is unacceptable. While the short-term prospects for the economy are bright, it is government finances that should be worrying the United Progressive Alliance dispensation. But the review does not reveal that the finance ministry is fully seized of the critical area of concern. The fiscal deficit in the first six months of 2004-05 is indeed much smaller, in relative terms, than in the corresponding period of last year. However, this is largely because of the larger than anticipated pre-payment of loans by state governments under the debt swap agreement. As the review itself notes, these pre-payments are one-off receipts so the improvement in the fiscal deficit in April- September is misleading. It is the developments in the revenue deficit rather than the fiscal deficit that are disturbing. The revenue gap in April-September was as much as 78.9 per cent of the budgeted amount for the entire year. Clearly, the ambitious targeted reduction in the deficit from 3.6 per cent of GDP in 2003-04 to 2.5 per cent of GDP in 2004-05 is not going to be met. The reason for the ballooning of the revenue deficit is simple. It is not any galloping in expenditure that is responsible, but a less than anticipated rise in tax revenue. It was apparent when the budget was presented in July that union finance minister P Chidambaram had been excessively optimistic in suggesting that gross tax collections would increase by as much as 25 per cent this fiscal. Although the minister was quick then to reject such criticism, the wages of those unrealistic predictions are now being paid

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