FM stretches fiscal correction schedule

The five-year schedule on fiscal consolidation given on Monday by Finance Minister P Chidambaram, starting from 2012-13, is a rather relaxed one.

The recommendations in this regard of the 13th Finance Commission and the Kelkar panel report on fiscal correction were stricter, as were the papers laid in Parliament by then finance minister Pranab Mukherjee earlier this year to meet the requirements of the Fiscal Responsibility and Budget Management (FRBM) Act.

The Finance Commission and Kelkar panel recommendations were till 2014-15, while Chidambaram on Monday gave a road map till 2016-17. The Finance Commission recommended the fiscal deficit be contained at 4.2 per cent of GDP in 2012-13. The year’s Union Budget had projected it at 5.1 per cent of GDP. Now, Chidambaram has further increased this projection, to 5.3 per cent of GDP.

The Finance Commission report was given in December 2009, away from the present reality, analysts said.

As for the panel headed by Vijay Kelkar, who also chaired the 13th Finance Commission, the fiscal deficit was projected at 6.1 per cent of GDP for 2012-13 if the government did not take any action and 5.2 per cent if it did.

That the minister admitted to only slight slippage from 5.2 per cent indicates the government is serious about the steps the Commission had suggested, though it might not take all the steps recommended. The government has already distanced itself from the subsidy part of the Kelkar recommendations. The panel wanted the government to eliminate half the per-unit diesel subsidy in this financial year and the remaining half over the next one. It recommended eliminating the cooking gas subsidy by 2014-15, by reducing it 25 per cent this year and the remaining 75 per cent in the next two. "For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15," it had said.

It also wanted the proposed food security law to be introduced in phases and sale of sugar through the Public Distribution System to be done away with. For 2013-14, Chidambaram has pegged the fiscal deficit at 4.8 per cent of GDP.

The Finance Commission had wanted no more than three per cent. The Kelkar panel wanted 4.6 per cent. The Medium-Term Fiscal Policy Statement laid before Parliament in March had 4.5 per cent of GDP.

The finance minister then estimates the fiscal deficit to be 4.2 per cent of GDP in 2014-15. The Finance Commission had suggested three per cent and the Kelkar panel 3.9 per cent, as had the papers laid in Parliament.

The comparisons end here but Chidambaram gave a road map for two more years. For 2015-16, he pegged the fiscal deficit at 3.6 per cent of GDP and at three per cent in 2016-17.

DEFICIT PROJECTIONS Fiscal deficit as percentage of GDP
	‘09-’10	‘10-’11	‘11-’12	‘12-’13	‘13-’14	‘14-’15	‘15-’16	‘16-’17
13th Finance  Commission	6.8	5.7	4.8	4.2	3.0	3.0	—	—
Actual	6.4	4.8	5.8	NA	—	—	—	—
Kelkar Panel	—	—	—	5.2- 6.1*	4.6	3.9	NA	NA
FRBM papers laid  in Parliament by Pranab Mukherjee	—	—	—	5.1	4.5	3.9	NA	NA
Finance Minister  P Chidambaram's revised target	—	—	—	5.3	4.8	4.2	3.6	3.0
* Kelkar panel pegs fiscal deficit at 6.1 per cent of GDP for 2012-13 in case no action on fiscal correction is taken by government and 5.2 per cent in case policy steps are taken Source: Papers tabled in Parliament under FRBM Act, Kelkar Panel,  13th Finance Commission, and finance ministry

In other words, we can say the government aims to bring down the fiscal deficit to three per cent of GDP in the terminal year of the 12th five-year plan (2012-13 to 2016-17).

The original FRBM aimed to cut the deficit to this level by 2008-09. However, because of the global financial crisis and its effects here, this figure had surged in that year to six per cent of GDP, as the government introduced stimulatory spending to offset the global impact.

Hence, the Finance Commission had then pegged the three per cent target for 2013-14. The Kelkar panel did not expect it to be three per cent even in 2014-15 and so did the calculation in the papers tabled earlier this year by Pranab Mukherjee.