Rangarajan hints at budgeted fiscal deficit missing its target

Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan on Thursday hinted that the government might miss the budgeted fiscal deficit target this year due to a pressure on its finances amid slower-than-projected economic growth.

“In the current year, the budgeted fiscal deficit is 4.6 per cent. It is going to be difficult to achieve this. All the numbers do not gel well… But I think it should be one of the efforts to ensure that fiscal deficit is in the lines of what was estimated,” Rangarajan said at an event of the Indian Economic Service.

He said the Indian economy had the potential to grow at nine per cent given the good rate of savings and investment, but gross domestic product (GDP) growth in the current financial year could be only about eight per cent.

In its Economic Outlook for 2011-12, the PMEAC had scaled down its projections for economic growth to 8.2 per cent for the current fiscal from nine per cent pegged earlier.

Rangarajan said India faced some short-term and medium-term constraints which might come in the way of nine per cent growth. He highlighted inflation, balance of payments and fiscal consolidation as short-term concerns, and agriculture and infrastructure, mainly power, as problems in the long-run.

On balance of payments issue, the former Reserve Bank of India governor said so far there was no problem in financing the current account deficit (CAD) as capital inflows have been adequate. He, however, cautioned, there was a need to moderate our dependence on capital inflows for financing CAD

“I don’t think that by taking both imports and exports of goods and services taken together we might exceed two-and-a-half per cent of GDP of the CAD this year,” Rangarajan explained.

Justifying the rate hikes by RBI, he said, “We should use monetary policy in way that demand preference is brought down”. He also said pushing growth in India to above nine per cent might cause high inflation and officials should use monetary policy to bring down demand.

Talking about the slowdown in the US and Europe, Chief Economic Advisor in the Finance Ministry Kaushik Basu said there was no risk of a sudden halt in the US, but it confronted Europe. “I remain optimistic for India.