Discipline deficit to deliver

Address growth concerns and focus on ways to reduce deficit by the time economy recovers.

One of the first fiscal policy imperatives for the new government is likely to be the finalisation of a plan of action to reduce the Centre's fiscal deficit. This task may even receive higher priority than the need for introducing a fresh fiscal stimulus package to revive growth.

The Indian economy slowed down to 5.3 per cent in the third quarter of the last fiscal year, but the Centre's fiscal deficit for 2008-09 doubled to 6 per cent of India's total output.

Economists say the government should address growth concerns in the short-run but at the same time should focus on ways to reduce deficit by the time economy recovers.

“There is no need for further fiscal stimulus packages. The government could leave the excise duty at the same level for the current fiscal year,” said Rajiv Kumar, director of Indian Council for Research on International Economic Relations (ICRIER), a Delhi-based economic research institution.

Echoing the same viewpoint that there is no need for additional fiscal packages, Saumitra Chaudhari, member of Prime Minister’s Economic Advisory Council and economist with rating agency ICRA said, “The deficit will be high this year also as revenue collections are likely to be subdued in the first nine months in current fiscal (2009-10), as things might improve only from October 2009.”

Already record-high government borrowings in excess of Rs 3,00,000 lakh crore in current fiscal have hardened the yield on government securities, leading to fears that it might crowd out private sector investments.

Chaudhari said the Centre should look at disinvestment of the government's equity in public sector undertakings (PSU) as an option and increase private sector participation in the running of these PSUs as ways to bridge the fiscal deficit. Congress in its election manifesto ruled out selling majority stakes in state-owned enterprises but it was open to selling minority equity stake. Firms which have high government shareholding and are making profits could be part of the disinvestment programme.

Another issue that will dominate the fiscal policy agenda would be the implementation of the Goods and Services Tax (GST) from April 2010. Reaching a consensus between the Centre and the states on tax rates under GST and also on the agency that should collect the combined tax are on top of the agenda.

An issue that will be debated by the new government pertain to decontrol of oil prices and the treatment of off-budget items like bonds issued to state-run oil refiners.