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RBI pitches for reforms to contain fiscal deficit
January, 24th 2012

The Reserve Bank of India (RBI) on Monday pitched for expediting economic reforms including reduction of subsidy and implementation of the Direct Taxes Code (DTC) and Goods and Services Tax (GST) to contain the fiscal deficit which is expected to exceed the Budget estimate, reports PTI.

Prospectively, improvement in fiscal situation in 2012-13 is not only contingent upon the growth performance but also on the progress in implementation of tax and expenditure reforms, RBI said in a macro-economic review of the economy ahead of third quarter review of monetary policy.

Unless fiscal reforms are expedited, the Centre could miss the rolling target of fiscal deficit at 4.1% of the gross domestic product (GDP) for 2012-13 as set out in 2011-12 Budget, it said.

On the expenditure front, it said, the government needs to move towards deregulation of pricing of diesel for controlling its expenditure on petroleum subsidies.

It also said, A delay in enactment of the DTC Bill (presently under consideration of the Standing Committee on Finance) may affect its scheduled introduction from 1 April 2012.

It is expected that DTC system would improve compliance levels as rates of corporation tax and surcharge are reduced and tax base is widened, it said.

In respect of GST, it said, while the Bill to amend the Constitution for introducing this tax was tabled in March 2011, the draft GST legislation requires consensus on a number of issues involving both the Centre as well as state governments.

RBI also noted that the larger fiscal spending could further affect growth in the economy amidst a widening current account deficit.

There is need for cutting governments consumption expenditure and stepping up its capital spending in order to lift both the current and future growth. This will help the economy to get back to higher potential growth that it had realised in the pre-crisis period, it said.

It is estimated that the higher expenditure on petroleum subsidy could drive up the fiscal deficit by around 0.8 percentage points of GDP for 2011-12, RBI said.

The government pegged the fiscal deficit target at 4.6% for the current fiscal.

The government will face additional pressures on account of food subsidies when the proposed Food Security Bill is enacted and implemented, it said, adding, the government needs to control its expenditure on petroleum subsidies.

Subsidies and the resultant higher fiscal deficit may help in keeping inflation suppressed in near term, but over time the impact of higher subsidy induced deficit would exert pressure on the inflation path, it said.

The RBI report said decline of growth to below potential is expected to ease pressures on aggregate demand and thereby have a softening impact on generalised inflation.

Apart from this, declining international commodity prices has also emerged as a favourable factor, it said.

However, the pass-through of rupee depreciation and expansionary fiscal policy have emerged as major risks, offsetting the favourable impact from the lower demand pressures and commodity prices, RBI said.

The suppressed inflation from energy prices further complicates policy options as revisions in these prices could be inevitable, it added.

Wage inflation is still high in rural areas and real wages increased, though at a slower pace than previous year, it said.

Overall, the emerging trend in inflation so far is broadly in line with the projected path towards 7% by March 2012. The risks to softening of inflationary pressures, however, remain, it said.

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