Fiscal consolidation to start next year: PMEAC

The Prime Minister's Economic Advisory Council today said the process to bring down the fiscal deficit from the current 6.8 per cent to a more sustainable level could start from next year. 

"The magnitude of the deficit is a matter of concern," the PMEAC (Prime Minister's Economic Advisory Council) said in it's Economic Outlook for 2009-10, which predicts a consolidated fiscal deficit of 10.09 per cent for the Centre and the states together.

When some off-budget items are included, the deficit will be about 10.27 per cent of GDP this fiscal, it added.

"It is very clear that this level of fiscal deficit is not sustainable over a long period," PMEAC Chairman C Rangarajan told reporters here. 

 

"Eventually, we will have to take the fiscal deficit to the level it has been contemplated in the FRBM Act," he said.The Fiscal Responsibility and Budget Management Act, enacted in 2003 had envisaged cutting fiscal deficit by 0.3 percentage points every year to ultimately bring it to 3 per cent of GDP by 2008-09.

He said as the economy improves, it will be possible to bring down the fiscal deficit in a phased manner.

"In 2010-11, some efforts will be made to bring it down in a measured way and the process of fiscal consolidation will have to start from next year," he said.

"I think some reduction of the order of about 1.4 per cent or 1.5 per cent GDP in the first year and then another 1 per cent in the following year would probably take us to that level," Rangarajan said.

The PMEAC said government was successful in achieving substantial fiscal correction from 2003-04 to 2007-08. The consolidated fiscal deficit declined from 8.51 per cent in 2003-04 to 4.17 per cent in 2007-08.

However, the country's fiscal deficit jumped to 6.2 per cent last fiscal as the government had to increase its expenditure, cut taxes, provide stimulus packages to spur the slowing economy in the wake of the global financial crisis.

This year too, fiscal deficit has been projected to be at 6.8 per cent. "The large government deficits during the last two years were unavoidable; but it is not possible to sustain them in future."

PMEAC member Govinda Rao said the disinvestment in various public sector units, which has started will provide some cushion to the government to manage fiscal deficit but it is not the only source.

 "I think some reduction of the order of about 1.4 per cent or 1.5 per cent GDP in the first year and then another 1 per cent in the following year would probably take us to that level," Rangarajan said.

The PMEAC said government was successful in achieving substantial fiscal correction from 2003-04 to 2007-08. The consolidated fiscal deficit declined from 8.51 per cent in 2003-04 to 4.17 per cent in 2007-08.

However, the country's fiscal deficit jumped to 6.2 per cent last fiscal as the government had to increase its expenditure, cut taxes, provide stimulus packages to spur the slowing economy in the wake of the global financial crisis.

This year too, fiscal deficit has been projected to be at 6.8 per cent. "The large government deficits during the last two years were unavoidable; but it is not possible to sustain them in future."

PMEAC member Govinda Rao said the disinvestment in various public sector units, which has started will provide some cushion to the government to manage fiscal deficit but it is not the only source.