Bill on road map for deficit targets in the works

Even as doubts are cast over whether the government can realise its claim of meeting this financial year’s fiscal deficit target, the finance ministry is trying to table a Bill in the coming session of Parliament to amend an Act that will provide a road map for budget deficit targets for the next five years.

“We are trying to introduce the Bill in the winter session. We are still working out a new roadmap,” a finance ministry official said.

The amendments will provide a road map for various deficit targets and will lend itself to changes in the event of an economic downturn. The amendments are required because the earlier road map given by the Fiscal Responsibility and Budget Management (FRBM) Act expired in 2008-09. The new road map given by the 13th Finance Commission is available, but the government will come out with its own targets.

The amendments will provide a roadmap for the next five years.

“In the course of the year, the central government will introduce an amendment to the FRBM Act, laying down the fiscal roadmap for the next five years,” Finance Minister Pranab Mukherjee had said in his Budget speech for 2011-12.

The FRBM Act of 2003 and its rules provided for 0.3 percentage points reduction in fiscal deficit from 2004-05 to cut it to three per cent of GDP by 2008-09. However, the fiscal deficit doubled to six per cent of the GDP during 2008-09. This happened because the government had to provide stimulus to industry in the wake of global financial crisis. As such, it cut excise duty by three percentage points in phases and the service tax by two percentage points, besides stepping up public expenditure.

This time, the Bill may provide for side-stepping the roadmap during the period of economic crisis.

After deviating sharply from fiscal consolidation during 2008-09, the government came back strongly to fiscal consolidation during 2010-11 -- by increasing excise duty by two percentage points -- even though stimulus was only partly withdrawn. The original estimate of fiscal deficit was 5.5 per cent of the GDP during the financial year, but it was brought down to 5.1 per cent in the revised estimates. However, in actual, it turned out to be close to 4.7 per cent of the GDP.

However, for this financial year, it seems only the finance ministry is confident of reining in fiscal deficit to 4.6 per cent of the GDP. Analysts believe this will be difficult, given that the fiscal deficit has already touched in the first six months 68 per cent of the Budget target for the entire 2011-12.