The year 2014 is going to be decisive in more than one way. The country will vote to elect the 16th Lok Sabha. More importantly, the new government, no matter which party it belongs to, will have to have a strong commitment to continuing structural reforms, thereby providing a catalyst to growth. Enough water has already gone under the bridge. For India to take its place on the world stage; for India to reap its demographic dividend; for India to reduce poverty and social inequality; surpluses generated by growth are paramount. The momentum is crucial and cannot be lost.
Public spending has an important role in supporting economic growth but it also is a key variable influencing the sustainability of public finance. Over the last few years, the quality of public finance has been at the forefront of public debates. Also, the current policy objective of inclusive growth with stability is not possible without achieving universal financial Inclusion. Thus, financial inclusion is no longer a policy choice today but a policy compulsion. Given the limited room for higher expenditure in the short term, there is a pressing need to improve spending efficiency and targeting, particularly in the area of subsidies. While intended to help the poor, they often remain poorly targeted and a significant proportion goes to households above the poverty line. If there is growth, there will also be scope for making social spending a more powerful tool to deal with rising inequality. Social spending, which amounts to about 5 per cent of GDP in India, is low by international standards, including in comparison to other large emerging economies. However, India does not have much fiscal space to increase social spending, given the high deficit. Nevertheless, better targeting of inefficient subsidies offers a potential path for reform.
It is undoubtedly important to make growth inclusive. The best way to achieve this is by enhancing human capabilities for participation in the growth process and improved delivery of public/social services. These efforts will have to be undertaken at all levels of government, starting by putting public finances on a sound footing and improving the fiscal framework so that persistent large deficits do not undermine macroeconomic stability and investor confidence. Growth cannot take a back seat, to either politics or social demands.