Outlook: FISCAL Deficit

Pitching for hard reforms in the Budget, the Survey said fiscal deficit has to be reduced through overhauling tax exemption regime, strict penal mechanism to check evasion and better targeting of subsidies, to sustain 7-8% economic growth. The survey strongly recommended enhancing the deadline for wiping out revenue deficit before 2008 by taking advantage of the robust 8.2% growth in economy in 2003-04. While lauding the Centre for enacting Fiscal Responsibility and Budget Management Act, the survey warned â€œthe unobserved cost of fiscal deterioration is the growth foregone. To sustain the present growth momentum, it is essential that renewed efforts are made for fiscal consolidation.â€� The note of caution comes despite the fact that the combined fiscal deficit of Centre and states came down to 9.4% of GDP last fiscal from 10.1% in 2002-03. The Survey said fiscal consolidation was required to push up public investment in infrastructure and social sectors.â€œTo achieve the targeted annual average growth of 8%, Tenth FYP envisages an acceleration in investment rate from 24.4% to 32.3% in 2006-07. Of the 7.9% increase in investment rate, 2.6% increase would have to come from public sector. Without fiscal consolidation, such step up in public investment cannot be attained,â€� the Survey said. It pointed out that high revenue deficit at 3.6% of GDP indicated a problem in quality of fiscal deficit which was at 4.6% of GDP in 2003-04. â€œOver three-fourth of fiscal deficit was on account of revenue deficit in 2003-04, compared to less than 50% in 1990-91. As the economy is doing well now, adjustments required to eliminate revenue deficit by March 2008 as stipulated in FRBM Act need to be front-loaded,â€� the Survey said. It noted that fiscal deterioration was mainly on account of higher levels of expenditure on salaries, unfunded pensions, mounting interest payments, improperly targeted subsidies and decline in Tax-GDP ratio.â€œThe deterioration of the fiscal situation has not shown up in a crisis so far... But the continuation of the present fiscal situation is likely to adversely affect the macro economic situation,â€� it said. â€œIf private investment picks up, any undue pre-emption of resources by government to fund its deficits may lead to a firming up of interest rates and inflation,â€� it warned. To improve Tax-GDP ratio, the Survey said â€œthere is a clear need to overhaul the regime of exemptions, reduce the number of notifications, simplify procedures and move towards a paperless and transparent administration anchored on trust.â€� â€œIt is equally important to establish a rigorous penal and enforcement mechanism that takes care of those who violate the trust imposed, as is the practice in countries with low rates, simple tax laws and procedures,â€� it said. The Survey also favoured better-targeting of subsidies as expenditure on major subsidies has increased in nominal terms from Rs 9,581 crore in 1990-91 to Rs 40,416 crore in 2002-03, and further to Rs 48,636 crore in 2003-04.

Outlook: FISCAL Deficit

Pitching for hard reforms in the Budget, the Survey said fiscal deficit has to be reduced through overhauling tax exemption regime, strict penal mechanism to check evasion and better targeting of subsidies, to sustain 7-8% economic growth.

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