| Fiscal Management7. Today, we
must squarely confront and overcome the critical challenge posed by a weakening fiscal
situation. A long history of high fiscal deficits has left us with a legacy of a huge
public debt and an ever-growing bill of interest payments. This year we have incurred
unanticipated expenditure on national defence, elections and the super cyclone in Orissa.
The residual impact of the Fifth Pay Commission and the need for special fiscal assistance
to the States have added to our burden. All this, combined with shortfalls in receipts
from disinvestment and revenue, has raised our net borrowing requirements (our fiscal
deficit) to over Rs.1,00,000 crore. This will add about Rs.10,000 crore to our interest
bill next year. We must also find additional resources for Plan, Defence and for
additional transfers to States under the interim award of the Eleventh Finance Commission.
If we do not raise the resources and instead take recourse to even higher borrowing next
year, then we will jeopardise our prospects for growth, reignite the flames of inflation,
sow the seeds of another balance of payments crisis and place an unfair burden on the next
8. We must put our fiscal house in order. This means hard decisions and sacrifices. At the same time we must preserve the intrinsic dynamism of our economy, which alone can deliver sustained growth with social justice. For this reason, despite the severe fiscal strain, the budget support to the plan is being increased by Rs.11,100 crore to a level of Rs.88,100 crore compared to Rs.77,000 crore in B.E. 1999-2000.
9. Similarly, there cannot be any compromise on Defence. Our forces have once again demonstrated in Operation Vijay that they are second to none in the world. Government is committed to enhance the quality of our defence preparedness and to modernise our forces. In this budget I have made a provision of Rs.58,587 crore for defence, which is nearly Rs.13,000 crore more than in B.E. for the current year. This represents the largest ever increase in the defence budget in any single year. More will be provided whenever needed. We shall not shrink from making any sacrifice to guard and protect every inch of our beloved motherland.
10. Over the years the composition of Central Government expenditure has become highly rigid and prone to large, pre-committed increases. More than half of the annual budget outlays are transfer payments. Interest payments, Defence, Internal Security, Major Subsidies, Salaries, Allowances and Pensions and non-plan grants to States account for about 95% of non-plan expenditure and about 70% of total expenditure. To curb built-in expenditure growth and bring about structural changes in the composition of our expenditure, I am introducing the following initiatives.
I will have something more to say on major subsidies a little later.
11. These measures are necessary and are only a beginning. We shall pursue resolutely the objective of downsizing Government and prepare a roadmap for the purpose. For medium-term management of the fiscal deficit we also need the support of a strong institutional mechanism embodied in a Fiscal Responsibility Act. This had been suggested in the Agenda for Governance of the National Democratic Alliance. I have set up a committee to examine this issue and make suitable recommendations. I hope to bring the necessary legislative proposals to the House during the course of the year.
12. The challenge of fiscal management is not confined to the Central Government. The financial position of the State Governments has deteriorated sharply in the last few years. Revenue deficits have widened and borrowings are being increasingly used to meet revenue expenditure. Fiscal reform at the State level has acquired great urgency. While we have gone out of our way to help State Governments, the determination shown by some States to deal with these issues has also helped enormously. It will be my endeavour to take further collective measures in the next year for promoting fiscal reforms in the States. The final report of the Eleventh Finance Commission will provide valuable inputs for taking policy initiatives in this regard.