New Delhi: The Economic Survey for 2008-09 proved right fears that India’s populist economic policies of the recent past would widen the fiscal deficit. The survey revised up the fiscal deficit for the year ended March to 6.2% of gross domestic product, or GDP.
The fiscal deficit is the total amount borrowed in the course of the year by the government to bridge the gap between its income and expenditure. In 2007-08, India’s fiscal deficit was 2.7% of GDP.
The survey revised the deficit for 2008-09 from 6% estimated in the interim budget presented in February.
The survey proposed measures to reduce the deficit to 3% of GDP in the short run, the target originally proposed by the Fiscal Responsibility and Budgetary Management Act. The long-term proposal was more radical, calling for a zero deficit target on a cyclically adjusted basis. That means when the economy is expanding, there should be no deficit.
The survey revised the deficit for 2008-09 from 6% estimated in the interim budget presented in February. Sandeep Bhatnagar / Mint
James McCormack, head of Asia-Pacific sovereign ratings for Fitch, the credit rating agency, said a zero per cent target was “not plausible” for India, but 3% was a “reasonable target” for the medium term. “This is a realistic time limit,” said McCormack. “It won’t be possible to bring this deficit down quickly.”
Fitch reduced the outlook for India’s local currency to negative from stable at the end of 2008, on the back of concerns about the fiscal deficit.
The Economic Survey, which is a road map for future economic policy, suggested tax simplification, subsidy reform and divestment as remedies for India’s fiscal problems.
McCormack said he was pleased that the survey addressed some of Fitch’s concerns. “The subsidy issue is the most critical for us,” said McCormack, who is based in Hong Kong.
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The survey identified subsidies as a major hurdle in India’s ability to address the fiscal deficit and suggested reform of petrol, fertilizer and food subsidies.
Like many other countries, India has responded to the economic crisis and consequent slowdown in growth with fiscal stimulus packages. That’s meant more government spending. The survey did not rule out further stimulus packages if growth does not bounce back quickly, suggesting that revenue collection will be key to reducing the deficit in the medium term.
It proposed a range of revenue generating measures including revitalizing the divestment programme, which would see the government selling 5-10% stake in profit-making state-owned companies. Reports suggest this could raise as much as Rs25,000 crore. Another proposal recommended by the survey is the auction of spectrum, or airwaves, for third generation, or 3G, mobile phone services.
For long-term fiscal sustainability, the survey suggested a goods and services tax from 1 April 2010, as well as simplifying tax collections and introduction of a new income-tax code.
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India’s credit rating is currently one notch above junk status at BBB-. McCormack said even with the proposals included in the survey, the negative outlook remained. “The critical question is when growth resumes, will the government implement these measures (put forward by the economic survey) to reduce the fiscal deficit?”
McCormack said more important than the Economic Survey and the budget will be the recommendations for fiscal consolidation that will be released by the 13th Finance Commission in October.
“We don’t expect much from the budget because it is dealing with this year’s problem, which is growth,” said McCormack. “ We’re waiting for the 13th Finance Commission to deal with the medium-term issues.”
The National Institute of Public Finance and Policy, in a paper released in June, estimated the consolidated fiscal deficit, which includes that of the states and the Centre, at 8.09% of GDP for 2008-09. It termed India’s fiscal problems structural, not cyclical, which is at odds with position taken by the Economic Survey.