FM hits bull’s eye on fiscal targets

While on the one hand the government has projected the achievable targets for the fiscal and revenue deficit, there is no mention of the impact of farm credit waiver and of the Pay Commission. According to Abheek Barua, chief economist, HDFC Bank, “Fiscally I don’t think it’s a great situation. If there will be compensation to banks, it is likely to be funded through bonds, which will add to off balance sheet liability. The implementation of the Pay Commission’s recommendations will take the fiscal deficit easily over 3 per cent. The revenue deficit is also likely to shoot up.”

In future, it is not certain whether the FRBM targets will be achieved, considering these oncoming liabilities. But that is not the main criteria, said Gokarn, “The precise achievement of the FRBM target is less important. More important is the constant movement towards them.”

The government placed the advance estimate for GDP growth at 8.7 per cent for 2007-08. The medium term fiscal policy statement projects GDP growth rate to accelerate further to 9-10 per cent as set out in the 11th Five Year Plan. According to Kumar, “There are several measures in the budget that will help achieve this growth. Consumption and demand will increase because of the central excise duty cut from 16 per cent to 14 per cent. There will also be an increase in the disposable income in the hands of the salaried class as a result of the change in tax structure.”

But there is still lack of clarity on how the government plans to achieve this 9-10 per cent growth rate, said Barua. “I don’t see any measures on infrastructure funding, and so I think the budget is very unclear on these issues.” Added Gokarn: “A growth rate of 8.5 per cent seems a more realistic figure. Anything above 9 per cent requires more changes in the whole policy approach.”