Finance Minister P Chidambaram's sweeping budget cuts across numerous sectors to preserve India's credit rating and encourage foreign investment is now drawing fire from his fellow colleagues who fear it would leave lesser resources to fund their flagship welfare programmes ahead of the general elections.
The firepower on big-spending colleagues include tribal affairs minister Kishore Chandra Deo, rural development minister Jairam Ramesh and defence minister AK Antony who have objected to the proposed cut in allocations.
The latest to join the bandwagon of protesting ministers is Planning Commission head Montek Singh Ahluwalia since the burden of fiscal consolidation has largely fallen on plan expenditure, which is likely to be trimmed by around Rs 1 lakh crore in financial year 2013. However, this massive squeeze has raised concerns over the quality of fiscal consolidation, because it implies that the government is compromising on growth-critical spending at a time when private investment is anaemic.
Unfortunately, this purse tightening is likely to hit the UPA's much-loved and ever-popular rural welfare schemes like MNREGA since the finance ministry wants to cut down the central assistance for rural development that the by 0.8% in the upcoming budget, according to this DNA report.
According to the report, Chidambaram wants the gross budgetary support for 2013-2014 to be increased by only 5% as against a hike of 18% in 2012-13.
"Five percent increase in the GBS would mean that the finance ministry will provide only Rs 26,051, crore additional for the centrally-sponsored schemes in the upcoming budget which will amount to a total of Rs 5,47,051 crore in 2013-14.
Reading in between the lines, this lower GBS would cut allocation for rural development by Rs 20,000 crore and that for defence by about Rs 10,000 crore.
Jairam Ramesh, rural development minister, wrote to Chidambaram asking for a review of the cuts to rural welfare. This dispute over development spend will now have to be resolved by the Prime Minister, "who will have to strike a balance between the pressure to spend more on vote-winning welfare schemes and lowering fiscal deficit," reported Economic Times today.
Chidambaram’s cuts mainly affect capital investment which could hit the investment cycle and damage a drive to improve creaking infrastructure. Rather that just focusing on plan expenditure, the finance minister may be better off by targeting non-planned expenditure such as subsidies.
"There is a big risk of underspending, it is a very fine balance. The growth prospects when fiscal deficit of 4.8 percent was set have changed. There is room for reduction in spending, but the growth prospects now do provide the government some leeway. New data suggests that there is an issue of not just investment but also consumption. There is a need for turning the debate in favour of reducing revenue deficit, " Abheek Barua, chief economist at HDFC Bank told ET.
Looks like Chidambaram's UPA friends may prevent him from nursing the country's finances back to health and achieving his fiscal deficit target of 5.3 percent in FY13.