FM wants RBI to consider fiscal consolidation roadmap
RBI has time and again warned that the Centre should pursue fiscal correction path urgently
A day ahead of the monetary policy review, the finance ministry today laid down a revised roadmap for fiscal consolidation which pegs current year fiscal deficit at 5.3 per cent of the GDP, against 5.1 per cent projected in the Budget. As per the roadmap, the deficit would be brought down to 4.8 per cent by 2013-14, 4.2 per cent by 2014-15, 3.6 per cent by 2015-16 and 3 per cent by 2016-17.
Even as revised fiscal deficit projection is higher than the budget estimate, the slippage is not far from it, despite fiscal deficit touching around 66 per cent of the budget targets just in first five months of 2012-13. As such, it exhibits the Finance Ministry’s commitment to go for fiscal consolidation, analysts said.
Finance Minister P Chidambaram hinted the Reserve Bank of India (RBI) should take a cue from this and act accordingly in its half-yearly review of the policy on Tuesday. In its macroeconomic review today RBI cut GDP growth forecast to 5.7 per cent from earlier 6.5 per cent for 2012-13, but at the same time also raised inflation forecast to 7.7 per cent from earlier 7.3 per cent.
“I am making the statement so that everybody in India acknowledges the steps which we are taking, and also acknowledges the government is determined to bring about fiscal consolidation. And I sincerely hope that everybody will read the statement and take note of that,” Chidambaram said in response to a query on whether the RBI would cut rates.
RBI has time and again warned that the Centre should pursue fiscal correction path urgently. Many analysts attribute RBI decision not to cut rates to the Centre’s fiscal profligacy.
The central bank today said credible fiscal consolidation strategy is now on the anvil, but it also added that these measures need to be backed by further measures.
Accepting recommendations of the Kelkar panel, which had cautioned that fiscal deficit could shoot up to 6.1 per cent in 2012-13 if no steps were taken, the finance minister exuded confidence that disinvestment target of Rs 30,000 crore and telecom spectrum auction target of Rs 40,000 crore would be met.
The very fact that disinvestment target of Rs 30,000 crore is sought to be met, even without taking into account sale of shares held by the Specified Undertaking of UTI, speaks much about Chidambaram's confidence, experts said. The government has not raised even a single paise so far from the disinvestment this fiscal.
The Finance Minister, however, did not specify how the government world curtail subsidies.
Kelkar panel’s recommendations on administrative measures to improve tax collection, new models for disinvestment, disinvestment of residual stake in some companies, rationalisation of schemes, and strict monitoring of expenditure have been accepted.
The finance ministry has projected current account deficit to be 3.7 per cent of GDP or $70.3 billion against a record 4.2 per cent last fiscal and said most of it would be funded by Foreign Direct Investments, Foreign Institutional Investments and External Commercial Borrowings.
“As fiscal consolidation takes place and investors' confidence increases, the economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability,” he said.
Analysts, however, did not look convinced. Nomura in a statement said the measures announced would be insufficient to contain the fiscal deficit at 5.3 per cent due to higher subsidies and lower tax revenues.
On the Direct Taxes Code (DTC), he said a quick review was underway and by and large the government would abide by Standing Committee recommendations when the final version of the Bill is introduced in Parliament. The work is also in progress on the Goods & Services Tax, he added.
The Standing Committee had suggested raising income tax exemption limit to Rs 3 lakh from Rs 2 lakh at present, increasing investment limit for tax savings schemes to Rs 3.20 lakh and retaining corporation tax at 30 per cent.
The finance minister once again stressed that while funds would be made available for essential expenditure, especially capital expenditure, parking or idling of funds would be avoided. On monetization of land, as recommended by Kelkar panel, he said no decision has been taken.
The government is facing a problem of high twin deficits—fiscal and current account—as well as high inflation and low growth. Fiscal deficit was 5.8 per cent in 2011-12 while economic growth slipped to nine-year low of 6.5 per cent. The economic growth is expected to fall further this year. Earlier this month, Standard & Poor's had warned that India had one-in-three chance of a downgrade to junk.