Fiscal consolidation with quality focus crucial: RBI

KOLKATA: The Reserve Bank of India has expressed concerns over the quality of fiscal deficit as the government continues paying hefty subsidies on fuel, cooking gas and other public consumptions to woo voters.

The gross fiscal deficit widened in the first eight months of the current fiscal, but the government maintained it will meet the budgetary target of 4.8% of gross domestic product ( GDP) in 2013-14, raising the spectre of cuts in development expenditure.

“In this milieu, it is important to focus on fiscal consolidation, keeping its quality uppermost in consideration,” RBI said in its macroeconomic and monetary development report on Tuesday. The widening of revenue deficit, coupled with higher capital expenditure, resulted in a gross fiscal deficit of 93.9% of budgetary expectations during April-November 2013.

“A large part of deficit is being incurred to finance current consumption, which is deteriorating the quality of deficit,” Devendra Kumar Pant, chief economist at India Ratings & Research, said.

Madan Sabnavis, chief economist at CARE Ratings, said that while the Centre may meet, or even better, its fiscal deficit target, “the quality is not ideal”. “Ideally, the fiscal deficit should reflect healthy ontarget tax collections and zero slippages in non-development expenditure,” he said. Instead, the government may resort to cuts in project expenditure and forced disinvestment and higher dividend payouts by public sector units to make up for tax shortages and subsidy slippages.

“Adhering to fiscal discipline hinges upon the ability to withstand pressures to increase subsidies, including those on fuel and public utilities,” the report said.