The finance ministry is likely to peg the fiscal deficit for 2012-13 at around 4.9 per cent of the gross domestic product (GDP) in the Budget. It may also revise the figure for the current financial year from 4.6 per cent to around 5.5 per cent in the Budget estimate.
Officials, however, admit while fiscal deficit may be cut by 0.6 percentage points of GDP in the next financial, it would not be possible to restrict it to 4.2 per cent, as sought by the 13th Finance Commission. This is because of slippages in 2011-12.
However, the moot question is how to cut fiscal deficit by 0.6 percentage points of GDP, as the low economic growth may prevent the finance ministry from raising tax rates. Economists prescribe a rise in the excise duty rate and rationalisation of the tax structure and the administrative mechanism to resume fiscal consolidation in the next financial year.
The Reserve Bank of India had also asked the Centre to revert to the fiscal consolidation story.
“We will resume the path of fiscal consolidation, as recommended by the 13th Finance commission, but fiscal slippages in this financial year may be carried forward,” said a key finance ministry official. He added this meant fiscal deficit would be reduced by 0.6 percentage points of GDP in next financial year, as suggested by the commission. Still, it may not be possible to reduce it to 4.2 per cent of GDP.
The commission, headed by former finance secretary Vijay Kelkar, suggested the Centre’s fiscal deficit should come down to 4.2 per cent of GDP in 2012-13, compared with 4.8 per cent recommended by it this financial year.
If the fiscal deficit rises to, say 5.5 per cent of GDP in 2011-12, against 4.6 per cent pegged by the government in Budget estimates, the government would rein in the deficit at 4.9 per cent of GDP next year, a cut of 0.6 percentage points, something “on the lines of the Finance Commission recommendations”, the official said.
However, the recommendation was to reduce the deficit to 4.2 per cent of GDP, which may not happen in the next financial year. The commission had asked the government to limit fiscal deficit to three per cent of GDP in 2013-14, and keep it at that level in 2014-15 as well. So, these targets are also likely to be pushed forward, and this means fiscal deficit at three per cent may not be seen in 2013-14 as well.
Concern has also been raised on hopes of reducing the fiscal deficit by 0.6 percentage points of GDP, given the low economic growth. The dismal scenario may prevent it from raising general tax rates, while the proposed food security Bill would raise expenditure.
Parthasarthi Shome, director and chief executive, ICRIER, prescribed administrative measures to rein in the fiscal deficit, while also suggesting the excise duty rate should be higher than the service tax rate till the Goods and Services Tax (GST) came into effect. “Today, the goods tax rate has to be higher than service tax rate, as the base is lower. You are taxing only up to manufacturing. But when you have the GST, you can bring goods tax down to the level of the service tax, because your base now includes retail and wholesale as well,” he said. Currently, both excise duty and service tax rates are 10 per cent.
Shome added fiscal consolidation primarily had to take place from two mechanisms, both of which were administrative. “One is on tax administration, not tightening, but rationalisation. There is so much of leakage. The other is expenditure control. There is a lot of expenditure leakage....We cannot just keep raising taxes and increasing expenditure without adherence to what we are doing, in terms of our implementation quality,” he said.
Fitch Ratings director Devendra Pant said significant fiscal consolidation was achieved from 2002-03 to 2007-08 due to high economic growth, which resulted in high revenue buoyancy. “Due to expenditure rigidity, expenditure reforms in the short run are very difficult and the onus of fiscal consolidation totally lies with revenue performance,” he said, adding Fitch expects some rationalisation of taxes in the coming Budget.
Miscalculation on economic growth, lower disinvestment figures, the expected fall in direct tax collections and the increased subsidy burden would come in the way of the finance ministry’s ambitious target of reducing fiscal deficit to 4.6 per cent of GDP in the current financial year.