The Telegraph
Since 1st March, 1999
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Chronic fiscal deficit worries India Inc

New Delhi, Feb. 27: Industry is worried by the parlous state of government finances and the Centre’s propensity to scoop up money from the financial system to meet its gargantuan borrowing needs.

Expressing deep concern at the increasing fiscal deficit, Ficci president A. C. Muthiah said: “It is absolutely essential to check the revenue deficit to ensure that the government money flows for productive use facilitating the growth of infrastructure. The reforms must now embrace the states.”

Expressing his concern for the financial sector, he added, “Decline in the sanctions and disbursements by the financial institutions indicates that with the spread of universal banking, the importance of project lending is losing focus.”

The chamber was also of the view that once the required labour market reforms and tax reforms take place the economy will achieve the much needed 8 per cent targeted growth rate. These reforms are also necessary in the states in order to maintain India’s growth potential.

Appreciating the reform momentum in the country, the chamber said that the Survey has rightly identified technology, competition and benchmarking to the best international practices as the three key drivers of India’s economic growth.

CII president Ashok Soota said: “The Survey has rightly identified India’s public finance as an area of key concern. Deficits at the central and state levels have become chronic, with no clear roadmap on how the problem will be surmounted.”

The combined fiscal deficit of the central and state governments touched 10 per cent of GDP in 2001-02 and it is yet to be seen whether the target of reducing this to 9.3 per cent in 2002-03 will be achieved.

Soota also highlighted his concern on the increasing likelihood of default on a substantial amount of state government guaranteed paper as this would further add to the fiscal burden.Expressing his views, Assocham president R. K. Somany said, “There is a need to push the process of fiscal consolidation, increase the revenue kitty through user charges, phase out tax exemptions and plug evasions.”

He added, “This has become imperative as diversion of resources to the government would immediately affect the availability of funds for private investment, leading to a further drop in gross domestic investment in the next fiscal.”

Considering the fact that the Economic Survey has endorsed the recommendations of the Kelkar Committee report on tax reforms, Somany added, “This indicates that the forthcoming Union budget may bring more services, such as those provided by the doctors and mechanics, into the tax net, scrap tax on dividends from Indian firms to lure small investors back into the stock markets and abolish tax on long-term gains.”

Noted economist D. H. Pai Panandiker said: “The industry performed very well with growth going up to 5.3 per cent in the first three quarters of year 2002, up from 2.5 per cent in the same period last year. However, agriculture sector received a setback due to drought”. He added, “The services sector has performed well and exports have also picked-up growing at a rate of 20 per cent.”

Panandiker pointed out: “One problem is inflation. However, the rupee is quite stable vis-à-vis the dollar and the forex reserves have also piled up at the rate of $ 1 billion a month. Exporters are investing their earnings in the country.”

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