Speed up fiscal consolidation,growth bound to follow

Finance minister Pranab Mukherjee had pegged the fiscal deficit at 4.6 per cent of the GDP and the revenue deficit at 3.4 per cent of the GDP while finalising Budget 2011-12.

Written by ENS Economic Bureau | New Delhi | Published:March 16, 2012 12:23 am

Confirming that the Centre would miss its fiscal and revenue deficit targets for 2011-12,the Economic Survey on Thursday called for a rapid fiscal consolidation in order to spur growth and also to prevent unemployment.

“With a sharp decceleration in real GDP growth,particularly in the industry sector and continued high levels of prices in key commodities,a slippage is likely in the deficit targets envisaged at the time of Budget estimates,” said the survey which was tabled in Parliament on Thursday.

Finance minister Pranab Mukherjee had pegged the fiscal deficit at 4.6 per cent of the GDP and the revenue deficit at 3.4 per cent of the GDP while finalising Budget 2011-12. But this target was already breached by January end 2012,on the back of higher than expected expenditure and less than commensurate revenue growth.

“As such,a slippage of over 3 per cent each in revenue receipts and expenditure. Consequently,a slippage is likely from the revenue and fiscal deficits budgeted,” the survey said.

Weakening of global economic conditions have also played havoc with domestic finances,as the survey pointed out: “The fiscal outcome in 2011-12 is likely to be affected by the macroeconomic setting which indicates sharp slowdown in industry and rising costs affecting profits.”

But the report,which was authored by the finance ministry’s chief economic adviser Kaushik Basu has said the medium term targets for fiscal consolidation can still be salvaged.

The proposed Fiscal Responsibility and Budget Management (FRBM) Act should factor in expenditure reforms as well as leeway for counter-cyclical adjustments while setting targets for fiscal consolidation,it added.

Going forward,the survey said,“There is a need to anchor fiscal consolidation on structural reforms in expenditure… What is critical here is that policies need to be in place to cater to uncertainties that might arise during the course of the year,particularly in dealing with risks like global oil prices that have acquired a systemic nature.”

However,the combined fiscal deficit of the Centre and states could be on a ‘firmer footing’,as state governments have performed better in overall terms.

“At the consolidated level,states could generate a surplus of 0.2 per cent of GDP in their revenue accounts in 2011-12 (BE) as against a deficit of 0.3 per cent (of GDP) in 2010-11 (RE),” the survey noted.

But economists believe that taking comfort from the better performance of state does not really help as it is the Centre that has largely slipped on fiscal consolidation.

“The main issue is how the government tackles deficit. Just revenue augmentation will not be enough as the Centre needs to have the courage for bold reforms for expenditure rationalisation,” said DK Srivastava,director,Madras School of Economics.

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