Debating India

Lower fiscal deficit augurs well

Thursday 23 June 2005

The final fiscal data for 2004-05 seem to vindicate the Government’s optimism on containing the fiscal deficit, not only over the medium term extending to 2008-09, as enjoined by the Fiscal Responsibility and Budget Management (FRBM) Act 2003, but even over the short-term. An unexpectedly lower fiscal deficit figure of 4.1 per cent of the GDP, well below the revised budget estimate of 4.5 per cent presented to Parliament in February, provides some comfort. There is a special contextual significance as well. For the current year, 2005-06, the Government has committed itself to a fiscal deficit target of 4.3 per cent. In his budget speech, Finance Minister P.Chidambaram, citing fiscal compulsions following the acceptance of the Twelfth Finance Commission recommendations, said that he was forced to "press the pause button" vis-a-vis the FRBM Act, which calls for a reduction of 0.5 percentage point in the revenue deficit and 0.3 percentage point in the fiscal deficit. While the Finance Minister was confident of resuming the process of fiscal correction from the next year onwards, the lower fiscal deficit for 2004-05 obviously brings those efforts forward and gives them a greater urgency.

The key issue is to find out whether the factors that contributed to the improvement in government finances last year will be sustained this year. Non-tax revenues increased significantly, by over 7 per cent, last year. Large dividend payouts by public sector companies have been a significant contributor but it is doubtful whether the oil companies saddled with the twin burdens of under-recoveries and subsidies on the one hand and large investment needs on the other, can repeat that performance this year. Interest receipts from States, the biggest item of non-tax revenue for years, are set to go down for a variety of reasons. Many States have already swapped their high cost loans for securities bearing lower coupon rates. Big challenges lie ahead in pushing up the share of gross tax revenues in the GDP from last year’s 9.8 per cent to this year’s budget estimate of 10.6 per cent. A buoyant economy, underpinned by a strong industrial recovery, large non-oil imports and surging corporate profits should augment tax revenues under several heads including excise, customs and corporate taxes. Although by no means conclusive, the sharply lower fiscal deficit figure for 2004-05 augurs well for public finance, especially in the area of fiscal consolidation over the medium term.

See online : The Hindu

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