The government's obsession with fiscal correction is well known, even though its declared intentions have tended to be far more draconian and "fiscally disciplined" than its actual fiscal performance. The 1990s were marked by frequent references to the need to rein in the fiscal deficit as the major, even primary, goal of the government. Of course such an obsession was problematic at several levels, not least of which was the tendency to conflate the capital expenditure part of the fiscal deficit (which implied important public infrastructure spending which could be crucial for future growth) with the revenue deficits which reflected the excess of current spending over current receipts.
 
But the concern with controlling the large fiscal deficit becomes completely ridiculous in a period of economic recession, which is also characterised by large and growing foreign exchange reserves and large and growing public holding of food stocks. It would be difficult for anyone to argue that a more aggressive fiscal stance would be inflationary in such a context, and hard to deny that this would play a positive role in moving the economy out of recession. But this, nevertheless, is what the government continues to maintain : that the need of the hour is continued or even greater fiscal rectitude, regardless of the cost in terms of reduced levels of economic activity
 
What is interesting to note is that, despite all this emphasis on fiscal discipline, the 1990s showed very little tendency towards fiscal correction overall. Chart 10 shows the fiscal and revenue deficits as shares of GDP over the 1990s, divided into three sub-periods. The fiscal deficit here is calculated according to the new definition adopted by the Central Government since the 1999-2000 Budget, that is, excluding the share of small savings that go to the State Governments.
Chart 10 >>
 
The first sub-period is of course inflated by the effect of the crisis year 1990-91, when the fiscal deficit was as high as 6.6 per cent of GDP. Nevertheless, it turns out that the first sub-period shows an average level of fiscal deficit to GDP ratio (at 5.4 per cent) that is only marginally higher than the latest sub-period, when the average was 5.1 per cent of GDP. And what is worse, this was dominantly in the form of the revenue deficit, which climbed to the very high levels of 3.5 per cent of GDP for the period 1997-98 to 2000-01.
 
The counterpart of this, of course, was the collapse in capital expenditure which has already been noted. Central Government capital expenditure, shown in Chart 11, declined to only 1.15 per cent of GDP, not just well below the levels at the beginning of the decade, but many multiples less than the rate of 4 per cent achieved in the 1980s. And developmental expenditure of the Central Government, which also includes the items described as "social expenditure" also fell continuously over the 1990s, to levels of less than 7 per cent for the last years of the decade.
Chart 11 >>
 
If the fiscal deficit has remained "high" despite such falling public expenditure of the socially desirable variety, it is largely because interest payments constitute a growing and dominant part of expenditure, accounting for nearly half of current revenues. And this in turn is not because of the burden of past debt alone, but more importantly because of financial liberalisation measures which have forced the government to take greater recourse to open market borrowings and raised the cost of financing the deficit. Chart 12 shows how the share of the fiscal deficit being financed by market borrowing has ballooned from less than 18 per cent at the beginning of the decade to nearly 70 per cent by the year 2000-01. This nit only means that less of government expenditure has positive linkage and multiplier effects which could generate more economic activity, but it also and naturally makes the task of actual fiscal correction that much more difficult.
Chart 12 >>  
 
Of course, the RBI document must inevitably be more concerned with monetary policy and financial issues than with the real economy, and most of the Annual Report is indeed devoted to these matters. But because it has been quite frank and realistic about the nature of the problems confronting the real economy, it provides more valuable insights than most official publications that are actually concerned with describing the real economy. And the picture that it presents is one that calls for an urgent and thorough reconsideration of the current economic strategy.