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Road map on fiscal deficit pushed to budget session
December, 30th 2011

Government forecasts of the fiscal deficit and economic growth have gone awry, but the finance ministry is yet to publish the fiscal road map for the next five years through amendments to the Fiscal Responsibility and Budget Management (FRBM) Act, as promised in this years budget announcement.

With rising government spending and a drop in revenue threatening to push the fiscal deficit beyond 5.5% of gross domestic product (GDP), higher than the projected 4.6%, a fiscal consolidation road map is crucial for effective policy making by the government and the Reserve Bank of India (RBI).

The government had been planning to introduce the road map in Parliaments winter session, which ended on Thursday. It may now probably be tabled only in the budget session, said two finance ministry officials, who declined to be named.
Finance minister Pranab Mukherjee had promised the introduction of the road map in this years budget speech.

In the course of the year, the central government would introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years, he had said.

The amendments to the FRBM Act will be on the lines of the recommendations of the 13th Finance Commission, which suggested that shocks that could impact fiscal targets set under the legislation be specified beforehand. The report had argued that global recession, an agrarian crisis on account of drought or floods, asset price bubbles or systemic crises in the financial markets may require the government to expand its spending, forcing it to overstep fiscal deficit targets.

We are working on the amendment. It will not come in the winter session. Hopefully, it will be tabled in the budget session, said one of the finance ministry officials cited above.

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In 2010-11, the government managed to better its fiscal deficit target after reaping a windfall Rs1.06 trillion from the auction of third-generation telecom spectrum and broadband wireless access. It is on the verge of overshooting the target this fiscal. In the first seven months of the financial year, Indias fiscal deficit was almost 75% of the budgeted estimate, significantly higher than 42.6% in the corresponding period last year.

A shortfall in direct and indirect tax collections on account of slowing economic growth and a rising subsidy bill, along with the uncertainty over the government meeting its disinvestment target of Rs40,000 crore, has forced the government to borrow more from the market. Analysts expect the governments borrowing programme to reach Rs5 trillion in the current fiscal.

FRBM is an indicator or a statement of intent of the government towards fiscal consolidation. The road map will enhance the credibility of the fiscal policy, said D.K Joshi, chief economist at rating agency Crisil Ltd. With the government lining up additional expenditure in the coming years through the food security Bill, it is important to lay down an action plan on how the government will create fiscal space needed for this extra spending.

This can be dome either through restructuring expenditure or expanding the revenue base through tax reforms like the goods and services tax (GST), he said.

In its mid-quarter policy review, RBI had warned that the slow pace of fiscal consolidation will keep medium-term inflation risks in the economy high.

For the central bank, a clear fiscal road map helps in better policy formation, said Joshi. It is always good that there is coordination between fiscal and monetary policy and they are not at cross purposes with each other.

The government, which had budgeted a subsidy bill of Rs1.34 trillion for oil, fertilizer and food, is estimated to overshoot the projections by Rs70,000-80,000 crore in the current fiscal. On the other hand, its tax collections are likely to fall short by at least Rs30,000 crore.

Though the government is targeting Rs5.85 trillion from direct taxes in the current fiscal, the net direct tax collection was only Rs2.35 trillion during the first eight months of this fiscal. The indirect tax scenario is only slightly better. Of the Rs4 trillion target, the government collected Rs2.5 trillion in indirect taxes in the April-November period.

The 13th Finance Commission report had projected Indias fiscal deficit at 4.8% in 2011-12, 4.2% in 2012-13 and 3% in the next two fiscal years. But the fiscal deficit targets are unlikely to hold given the changing economic scenario.

Certain recommendations of the 13th Finance Commission may not hold true in the current scenario. For example, the growth figures on which they made their projections. When growth figures change, they impact the fiscal deficit also, Joshi said.

At the time the report was submitted, Indias economy was expected to grow at around 9%. This number has now been scaled down to 7.5%.

There is need for the government to bring about more structural changes in the fiscal road map, says Indranil Pan, chief economist at Kotak Mahindra Bank Ltd.

There needs to be a clear strategy on issues such as the implementation of the direct tax code and the GST. The government needs to look for ways to widen the service tax net, to ensure that this segment is taxed commensurate with its contribution to GDP, said Pan. On the expenditure side, the government needs to take steps to check slippages in its flagship programmes. Another issue is oil subsidy. After deregulating petrol prices, the government has developed cold feet for freeing up diesel prices.

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