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Govt must start fiscal consolidation in FY11: PM panel

Govt must start fiscal consolidation in FY11: PM panel
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First Published: Fri, Feb 19 2010. 04 16 PM IST
Updated: Fri, Feb 19 2010. 04 16 PM IST
New Delhi: India should begin to lower its fiscal deficit in the Budget set to be announced next week but should not cut capital spending on infrastructure, a top government panel said on Friday.
The panel also projected economic growth of at least 8.2% in 2010-11, from over 7.2% forecast for the current fiscal year. Other top officials have said the economy would grow at 8% in the year that ends March 2011.
The fiscal deficit, running at a 16-year high of 6.8% of GDP this year, threatens to push up long-term market interest rates and constrain the setting of monetary policy, the prime minister’s economic advisory council said.
Market watchers say continued heavy government borrowing would crowd out credit to the private sector, drive up rates and add to the government interest burden.
The panel also warned about the spread of food price inflation to the broader economy.
India aims to cut its fiscal deficit to 5.5% of GDP for the year that begins 1 April, and Union finance minister Pranab Mukherjee is expected to announce a partial roll-back of stimulus measures when he announces the Budget for the next fiscal year on 26 February.
“Although the large deficits this year and the last year did have a counter-cyclical impact, it is necessary to initiate measures towards fiscal consolidation in the forthcoming budget,” the council said in its review of the 2009-10 fiscal year.
The council said by keeping spending and subsidies at current levels, it was possible to cut the fiscal deficit by 1-1.5% for the year that ends in March 2011 without hurting economic growth. An improving economy and sales of state company stakes and 3G cellphone spectrum are expected to lift revenue.
“While it is important to reduce the fiscal deficit significantly in the coming budget, it is important to safeguard capital expenditures, particularly in the infrastructure sectors,” the report said.
Poor infrastructure has long been a brake on India’s growth, and government efforts to close the shortfall have been hampered by red tape, difficulties over land acquisition, and a lack of long-term funding sources.
The council’s head, influential former Reserve Bank of India (RBI) governor C Rangarajan, said he expected government borrowing for the 2010-11 fiscal year to be around or slightly lower than the current year’s record Rs4.51 trillion ($97 billion).
The central bank and economists polled by Reuters expect a slight rise in gross borrowing in the new year. The Reuters poll pegs the gross market borrowing figure for 2010-11 at Rs4.61 trillion because of higher redemptions.
Indian bond and foreign exchange markets shrugged off Rangarajan’s comments, which traders said were broadly in line with those made by other policymakers.
At 0747 GMT, the yield on the 10-year benchmark bond was at 7.89%, higher from its Thursday close of 7.86%. The partially convertible rupee was trading at 46.4575/4675 per dollar, from the previous close of 46.27/28.
Rangarajan said he expects wholesale price inflation to hit 8.5% by the end of March, although some private forecasters expect it to reach double-digits by then.
Still, the BBI has said it is unlikely to move interest rates before its 20 April policy review, barring an unforseen event.
Growth and inflation data have both been on the rise.
“I think the RBI will adopt a wait and watch policy and any action could happen only in the April review,” said M Govinda Rao, a member of the Prime Minister’s Economic Advisory Council.
Rangarajan said the economy will grow at over 7.2% in the year that runs through March, slightly lower than the central bank’s projection of 7.5%.
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First Published: Fri, Feb 19 2010. 04 16 PM IST