Rangarajan cautions on fiscal deficits

Fiscal consolidation is one of the critical challenges on the way forward to sustaining high rate of growth, and the negative consequences of excessive fiscal deficits are a standard fare of textbook economies as also staple of a current debate in our country, said C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister.

"The arguments against excessive fiscal deficits are well-known as they disempower the government's fiscal stance by preempting the resources available for physical and social infrastructure thereby eroding the productivity of public expenditure. In an economy with capital controls where investible savings are limited, fiscal deficits crowd out private investments. Depending on how they are financed, fiscal deficits can have an adverse impact on the economy through inflation, interest rate and exchange rate," he said, adding that fiscal deficits are particularly harmful if borrowing is used to finance current expenditure as happens in the case of revenue deficits.

Rangarajan was delivering the inaugural address on 'Sustaining the higher growth' at the 48th National Cost Convention being organised by the Institute of Cost and Works Accountants of India (ICWAI) in Hyderabad on Thursday.

Stating that the Centre has enacted the Fiscal Responsibility and Budget Management (FRBM) Act after much debate, taking upon itself the obligation of reducing fiscal deficit to 3 per cent of the GDP and completely eliminating the revenue deficit by 2008-09, he informed that in response to the incentives provided by the Twelfth Finance Commission, several states too have enacted their respective fiscal responsibility legislations.

While substantiating the argument that the resources required for development may be in excess of the resources that can be made available within the fiscal responsibility restrictions, he said the solution, however, does not lie in throwing away hard-won gains by abandoning the FRBMs.

"The solution instead lies in harmonising the fiscal discipline imposed by the FRBMs with the resources needed for development expenditure," he said.

For this, he said, both the central and state governments were required to prune their unproductive expenditures, rationalise the plethora of schemes and programmes, and then identify whether any segment or element of the FRBM targets needs to be rephased to be consistent with the resource requirements for productive expenditures.

"Frequent tamperings with FRBM targets will erode credibility," he cautioned.