New Delhi: Finance minister P. Chidambaram on Monday reiterated his resolve to push for fiscal consolidation and promised new measures in the next few weeks based on the recommendations of the high-level panel he had constituted.
The minister, who has been meeting executives of the mutual fund and insurance industry over ways to attract more household savings, also signalled fresh measures for the capital market that will be routed through the Securities and Exchange Board of India (Sebi).
In an interaction with some TV channels, the finance minister said, “The Kelkar report will be uploaded by end of the week... There will be some slippage (from the fiscal deficit target of 5.1% of GDP). But how much slippage will be there will depend on the decisions we take in the next few days.”
Shortly after taking over in August, Chidambaram constituted a three-member committee under former finance secretary Vijay Kelkar to suggest a path for fiscal correction. The committee submitted its report earlier this month. In the course of his interaction, the minister also referred to his 6 August statement listing a range of policy measures, including easing of supply-side constraints, speeding up clearances for investment, clarity in tax laws, increasing savings, accelerating large projects, and providing relief to companies in industries under stress.
He also hinted at some decisions regarding the capital market, in a move aimed at improving investor sentiment. “In the next board meeting of Sebi, there will be some decisions taken.” The regulator’s board is expected to meet later this month.
Interestingly, the minister didn’t put a number to India’s expected growth this year, but said most people expect it to be in the range between the Reserve Bank of India’s (RBI) estimate of 6.5% and the Prime Minister’s Economic Advisory Council’s 6.7%.
The finance minister’s remarks come after a week in which the Congress-led United Progressive Alliance (UPA) shed its diffidence and announced several measures to tackle the fiscal deficit and attract foreign investment. It effected an increase in the price of diesel and limited the supply of subsidized cooking gas, and followed up by allowing foreign investment in retail stores, airlines, and cable and satellite broadcasting companies.
These measures were met with a measure of scepticism by international rating agencies that had previously warned India about a possible downgrade.
On Monday, Reuters reported that Fitch Ratings had flagged considerable execution risk given the rift within the ruling coalition that has, in the past, forced the government to reverse policy changes. Broader concerns regarding the weak and inconsistent regulatory framework remain, the rating agency added.
Chidambaram said the government doesn’t “make policy to get better credit ratings”.
The UPA faces its first test on Tuesday, when the deadline laid down by ally Trinamool Congress (TMC) for a rollback of the diesel price hike and foreign investment in retail stores expires. The finance minister ruled out a reversal.
Chidambaram said the government will take steps to augment revenue by improving the tax administration and also work to curb expenditure. “The spectrum auction process will go up to (the) end of December. My expectation is that we should get a good price. But that has already been factored in. We need to look at maximizing other sources of revenue and could also curtail some expenditure,” he said. His reference is to second-generation (2G) spectrum that will be auctioned following the cancellation of 122 licences earlier this year by the Supreme Court.
Chidambaram also said the government would try to meet its disinvestment target of Rs.30,000 crore for the current fiscal and stick to the borrowing targets set in the budget.
“My immediate concern is (that) we should not borrow more. The market is favourable and we can divest,” he said. “We will look to meet the target that has been budgeted.”
Chidambaram said direct cash transfers for fertilizers and cooking gas will help the government curb its burgeoning subsidy bill. He added that the government’s steps may push RBI to cut its policy rate in the next review of monetary policy.
“Once we lay out the path of fiscal consolidation and it is a credible path, then RBI will be far more supportive to growth. Between now and 30 October, the government can take a lot of measures.” He added that even in this policy, “RBI’s language has changed.”
Chidambaram, while addressing the full Planning Commission meeting on 15 September, had conceded that the subsidy bill was likely to go up to 2.4% of GDP, substantially higher than 1.9% of GDP projected in the budget by then finance minister Pranab Mukherjee.
The higher projection was despite the decision to increase diesel prices and limit the number of subsidized cooking gas cylinders.
The subsidy calculations suggest that the fiscal deficit could go up to 5.6% of GDP in the current fiscal even without taking into account the possible fall in revenue collection.
Economists pointed out that despite the recent steps the government’s fiscal deficit target is likely to exceed 6% of GDP in the current fiscal.
“The scope for the government to act is very limited. In a downturn, revenue collections are not going to increase. When profits of companies are going down, tax collections cannot increase,” said D.K. Joshi, chief economist at rating agency Crisil. “On the expenditure side, the government cannot touch food subsidy. They have limited scope for controlling the other subsidies. But in case global crude prices rise, the government may have to go in for another round of diesel price hike.”
Chidambaram, however, said that the government had taken whatever steps that were ‘doable’ in the current political situation. “As far as diesel, kerosene and LPG are concerned, we have done what is doable. The political government knows what is doable,” he said.
The finance minister brushed aside any threat to the government’s political survival due to possible inclement action by allies such as TMC.
