Amid fears of the fiscal deficit exceeding the estimate of 4.6% of the GDP in 2011-12, the Planning Commission has suggested that the government cut subsidies and focus on bridging the revenue-expenditure gap in the upcoming Budget.
"The broad focus (of the Budget) will be on cutting

 
down the fiscal deficit and containing subsidies, but it will not be an easy task," Planning Commission deputy chairman Montek Singh Ahluwalia said in an interview to business television channel CNBC TV18.
In its third quarterly monetary policy review last week, the Reserve Bank, too, had underlined the need for the reducing the fiscal deficit.

"The finance minister, on several occasions, has said that he does intend to get back onto the fiscal consolidation path. Now, exactly how much is something that only the Budget will tell us, but I don't think there is any doubt that the government intends to return to the consolidation path beginning next year.

"We need to know from the Budget exactly how much can be done and over what time period," Ahluwalia said.

He said that markets globally are interested in knowing what India's medium-term fiscal trajectory would be.

"I don't think anyone expects to see massive contraction on these steps, but people do recognise that fiscal deficits all over the world have expanded a little too much and they want to be reassured that the corrective process is underway and I hope the Budget will give that signal," the Plan panel deputy chief said.

Senior government ministers, including finance minister Pranab Mukherjee, had in recent days indicated there will be some slippage against the fiscal deficit target of 4.6% of the GDP in 2011-12.

While revenue collections have been below expectations, there is also a huge subsidy burden on items like food, fertiliser and fuel that is likely to exceed the Budget estimate by over Rs 1 lakh crore.

Asked about the RBI's recent observation that it would be difficult for it to move ahead with rate cuts if it is not backed by any fiscal policy action, Ahluwalia said the apex bank is probably holding back from loosening its monetary policy as it wants to be comfortable about the inflation situation.

"The job of reserve banks around the world is to be striking notes of caution. So what the RBI has done in the last policy is giving a clear signal that the period of monetary tightening is over and that is a genuine reflection on their part that the warning signals on inflation are certainly no longer red; they may even be changing from amber to green.

"But obviously the RBI wants to hold back until it's absolutely sure," he said.

Ahluwalia added that as far as the fiscal deficit is concerned, there is no doubt in anyone's mind that one cannot expect to get soft interest rates purely through monetary policy if the fiscal situation is not supportive.

"So that's not new and what the (RBI) governor is saying is that he hopes that the Budget will signal a process of fiscal consolidation and that will certainly give him more room to act.

"No doubt that the room that the RBI has on interest rates is very powerfully affected by what the fiscal stance is and we will only know that when the Budget is presented," he said.

Ahluwalia, however, argued that reducing the subsidy numbers will not have any impact on inflation.

"I am not aware of anyone anywhere in the world who believes that subsidies are the way of controlling inflation. Subsidies are a way of controlling a particular price, so the proposition that if you do something on subsidies is going to have a harmful effect on inflation, I don't buy that.

"What will happen if you do something on subsidies is one price might go up, but to the extent of which the subsidy reduces the fiscal deficit, there will be less pressure in the system on prices in general," he said.

Ahluwalia added that food inflation is "likely to cool off and stabilise at 5-6%."

He further said: "As far as inflation as a whole is concerned, obviously what you are seeing in food inflation is a very low level. I would expect, by the way, that you should not think that food inflation is going to remain negative.

"In a well-functioning system, if you are targeting 5-6% inflation for the country as a whole, then on balance, most prices should move in the 5-6% range."

Food inflation has been in the negative zone since mid-December and stood at (-)1.03% for the week ended January 14, the latest date for which numbers are available. Headline inflation fell to a two-year low of 7.47% in December, 2011.

In its review last week, the RBI said that inflation is likely to moderate to around 7% by March-end. It, however, warned that high international commodity prices are still a concern.

"We are also getting out of what people would call the very uncomfortably high single-digit range, which is above 8%, and we are getting into a more comfortable range. Time will tell, but so far, if you have to make a summary statement, the most  important thing is the news on inflation has turned very significantly positive.

"Now this doesn't mean that things can't deteriorate, hundreds of things could happen, but the bottom line, your breaking news on inflation has to be that things have eased," Ahluwalia said.