The government expects to lower both its fiscal targets in 2007-08, but it is still a distance from meeting the targets set in the Fiscal Responsibility and Budget Management Act.
Budget 2007-08 expects the government’s total gross borrowings, or the fiscal deficit target, to be 3.3% of GDP, compared to 3.8% expected in the Budget for the current fiscal year. Even the revenue deficit, which is the excess of the government’s current expenditure over its income, is budgeted to drop sharply to 1.5% of the GDP, compared to 2.1% targeted this year.
However, the FRBM Act requires the government to wipe out its revenue deficit and cut its fiscal deficit to 3% by 2009. Finance minister P Chidambaram admitted to reporters that the government had only managed to partially fulfil its commitment under the FRBM Act, that is, reduce revenue deficit by 0.5% a year.
To a question on the revenue deficit, Chidambaram replied: “I admit that it might be difficult to go from 1.5% to zero in one year. However, wait and see what happens next year.”
Even in the current year, government barely managed to stay within its budget deficit targets, failing to take full advantage of the opportunity provided by the sharp rise in growth. Despite a 30%-plus rise in gross revenues, the government could cut its revenue deficit to only 2% compared to the targeted 2.1%, and its fiscal deficit to only 3.7% from 3.8%.
Indeed, in absolute numbers, the revised fiscal deficit in 2006-07 has actually gone up to Rs1.52 lakh crore from the target of Rs1.48 lakh crore, requiring an unexpected recourse to Rs 3,047 crore of short-term loans and Rs 10,926 crore withdrawal of cash balances. If the country’s national income had not gone up as fast as it did, the target of fiscal deficit to GDP ratio would have been overshot.
That’s the other side of the happy revenue picture: Borrowings have gone up, and so has expenditure -- subsidies on urea, for instance, have gone up by Rs 5,200 crore. Says M Govinda Rao, director of the National Institute of Public Finance and Policy: “There has been no expenditure compression at all. I have a feeling they might take a pause again next year and postpone the final FRBM target year to 2010.”
Adds Kristin Lindow, vicepresident, Moody’s Investors Services in New York: “Missing amid all the talk of fiscal probity is the need to truly consolidate the off-budget accounts to have a better sense of the true picture.” States have done better than the Centre on both fiscal and revenue fronts this year. Combined gross fiscal deficit could decline to 6.5% of GDP, a sharp improvement over 9% even three years ago.