“The Indian economy is presently poised on the edge of a fiscal precipice…”
Right from the attention-grabbing opening line, the Kelkar Committee Report on Fiscal Consolidation grimly warns that unless the subsidy on fuel, food and fertilizer is cut back to sustainable levels, India will face an economic crisis worse than the one in 1991.
Given the red light signs, the report says, if no action is taken, India is likely to land in a bigger fiscal mess than the one in 1991. But the government may choose to ignore it as it finds some suggestions contrary to the goal of sustained, inclusive growth. Viewed overall, the report issues the starkest warning ever about the risks the economy faces from the government’s extravagant spending and the failure to contain subsidies.The report follows it up with some stern recommendations to bring the subsidy bill under control.
The report admits that the measures will certainly have significant short-term negative impact on household incomes and spending. But it warns that the pain would be even worse if fiscal consolidation were not pursued. The wages of a do-nothing approach would be the risk of a much larger adjustment of incomes and spending, with a ballooning fiscal deficit and its consequences for much slower growth, rising unemployment and higher inflation.