Paring Gross Fiscal Deficit Is An Imperative
The committee on capital account convertibility (CAC) in its report to the Reserve Bank has stressed on the reduction of the gross fiscal deficit as a necessary concomitant in the move towards a full capital CAC in India.
The present macro economic environment in India is characterised by signs of resilience and strength. It is of the considered view that the time is now apposite to initiate a move towards CAC, says the report. However, the committee has recommended staggered float of rupee over three years on the considering the fiscal scenario of the country.
The report cautions that the initial conditions do contain certain weaknesses, particularly, the structural drag in the fiscal accounts and the quasi-fiscal deficit, the size of non performing assets in the banking system, the persistence of visceral aspects of financial repression in terms of high cash reserve requirements and the vestiges of administered interest rates.
Taking a cue from the initiatives adopted in the Union Budget for the fiscal 1997-98, the Committee recommends a reduction in the GFD and gross domestic product (GDP) ratio from a budgeted 4.5 per cent in 1997-98 to 3.5 per cent in 1999-2000. There is an imperative need to work towards a reduction in the GFD says the report.
Further, the reduction in the centres GFD should be accompanied by a reduction in the deficit of the state government .
Besides, a reduction in the quasi-fiscal deficit is also necessary, said the report. Any slackening in the pace of fiscal adjustment would render the task of opening up of the capital account fraught with dangers of slippages, rollbacks and reversals of capital flows
.According to the committee, adherence to the projected track of fiscal consolidation as a critical precondition for CAC. The firm establishment of the preconditions need to be viewed as processes rather than as one time indicators.
Structural reforms undertaken in the wake of the payments crisis of 1990-91 led to a strong revival of growth in the economy. The recovery has been accompanied by distinct signs of stability and the momentum of growth of an average of 7 per cent in the past three years, appears sustainable. Moreover, GFD of the Centre dipped from 8.3 per cent of GDP in 1990-91 to 5 per cent in 1996-97, the lowest level in decades.
Besides, the current account deficit in the BoP has narrowed from the unsustainable level of 3.2 per cent of GDP in 1990-91 to a little over one per cent in 1996-97. Between 1990-91 and 1995-96 there has been a reduction in the external debt -- GDP ratio from 30.4 per cent to 28.7 per cent and in the debt service ratio from 35.3 per cent to 25.7 per cent.