Expert Zone

Straight from the Specialists

Higher growth can help lower deficit

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

India’s bloating budget deficit has been a matter of concern. It means more borrowing by the government which results in overcrowding of the debt market and consequently, a higher rate of interest for the private sector. It also raises the rate on borrowings from abroad due to the downgrading by rating agencies which is bound to follow.

Finance Minister P. Chidambaram had therefore asked all ministries in May to cut non-Plan expenditure by 10 percent and has now banned new recruitment in order to reduce the deficit.

Government expenditure has certainly been getting out of hand, more due to subsidies on food, fertiliser and petroleum products. In the absence of these subsidies, the budget deficit would have been less than 3 percent. But subsidies are politically sensitive and can at best be reduced only gradually. Even a 7 percent cut in subsidies on diesel last September forced a change in the UPA government. Most other expenditures have become sticky and cannot be reduced without comprehensive administrative reforms.

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