Fiscal consolidation on track, may hit deficit target early

Fiscal consolidation on track, may hit deficit target early

New Delhi: India looks set to keep its budget deficit to manageable levels, a fact highlighted by the Economic Survey and an expert on public finances, though the latter attributed this more to a growing government revenue than prudent spending.

Economic Survey 2010-11, presented in Parliament on Friday, said the fiscal consolidation process envisaged by the 13th Finance Commission in its report last year, is on track.

Also see | Medium-Term Plan (PDF)

Going forward, the survey added, “deepening the reform process would hold key to sustaining the fiscal consolidation process."

Govind Rao, director, National Institute of Public Finance and Policy, said that economic recovery and rising with tax collections (they grew by 17-18% this year), the target of reaching a fiscal deficit of 4.8% of GDP in 2011-12 will not be a difficult one at all.

Indeed, India is likely to achieve that target a year ahead of schedule, in 2010-11.

“By that count it will not be difficult to achieve a 3% fiscal deficit figure by 2014-15 either with some adjustments," he added.

The 13th Finance Commission, which was set up in 2008 under Vijay Kelkar, recommended bringing down the fiscal deficit to 3% by 2015, a proposal that was accepted (in principle) by the government.

The recommendation was in keeping with the commission’s strategy of freeing resources to increase the level of public investment and, thereby, drive growth. While the Economic Survey recognized the contribution of growing tax revenue to achieving the fiscal deficit target, it also stressed on the importance of expenditure management. “A beginning has already been made with the reforms announced in subsidies, some of which have already been implemented," it said.

And the finance ministry’s chief economic advisor Kaushik Basu said more steps to curb expenditure and increase revenue were in the offing: “Fiscal consolidation trends show they are in line with the medium term policy. During the slowdown we had to raise private demand and now the time has come to withdraw fiscal stimulus given earlier."

Basu added that the delivery of subsidies for food and fuel distributed through the public distribution system (PDS), and for fertlisers would have to be improved to ensure that the benefits reached those they were meant for. Since last year’s Union budget, the government has demonstrated its intent of doing this. On 1 April, it announced a nutrient-based subsidy for fertilizers. Earlier, it had announced reforms in direct and indirect taxes to improve tax buoyancy. And more recently, it has expressed a desire to move to direct cash transfers in the case of some products distributed through PDS, such as kerosense.

The economic survey also said the process of fiscal consolidation has started after two years of purposive expansion and that the roadmap laid out by the Government Debt Report 2010 could help both the centre and the states do better on this front.

The Debt Report was presented in November 2010; it analyses the prevailing situation and chalks out a road map for reduction of overall debt between 2010-11 and 2014-15.

The report has said that between 2010-11 and 2014-15 the proportion of total expenditure to GDP is to go down by 2.5 percentage points to reach 13.5% of the GDP in 2014-15 and the proportion of tax to GDP is to rise to 1.4 percentage points to reach 12.2%.