New Delhi, July 9: The Narendra Modi-government could settle for a higher fiscal deficit than mandated under the Fiscal Responsibility and Budget Management (FRBM) Act in the short term as it tries to crank up a faltering economy, forecasting a growth rate of anywhere between 5.4 per cent and 5.9 per cent this year.
The Economic Survey for 2013-14, released just a day before the new government’s first budget that is expected to lay down a policy road map for the next few years, said there was a need for a new FRBM Act “with teeth”.
“The modified act needs to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored,” the survey said, which seemed to indicate that finance minister Arun Jaitley could soft pedal fiscal consolidation in the short term — in much the same way that his predecessor P. Chidambaram did, not once but twice in 2005 and 2008.
Chidambaram, a corporate lawyer like Jaitley from the opposition Congress party, had shown a fiscal deficit of 4.6 per cent of the gross domestic product (GDP) for 2013-14 and had promised to reduce this to 4.1 per cent of GDP this year.
In the interim budget presented in February, the UPA government had committed to a new glide path for paring deficits, committing to bring down the revenue deficit to 1.5 per cent and fiscal deficit to 3 per cent by 2016-17.
The government today also indicated that it could bring in an interim central Goods & Services Tax (GST).
However, a significant portion of the crude and fertiliser subsidy bill which should have been paid out last year was shifted to the current year, adding to the pressure on the fiscal front for Jaitley.
The survey “shows the gravity of the economic situation that needs correction”, Jaitley told reporters. “Inflation needs to be moderated. Fiscal deficit needs downward correction over the next two years,” he added.
Besides, an ongoing civil war in Iraq means the price of crude and consequently the subsidy India pays for cheaper diesel and cooking gas could go up. A looming monsoon failure could add to the bill as the government considers underwriting farm loans.
However, the Modi government has started out life promising huge spends on infrastructure — roads, ports, airports, railway networks, including a gleaming bullet train. The survey makes a case for “keeping fiscal deficit in check without compromising on capital expenditure”.
If the finance minister wishes to clean the slate and pay off old bills along with the new, his subsidy payout is likely to cross the targeted 4.1 per cent of GDP.
Analysts believe he may do just that and then promise a tougher regime to pare the deficit, which represents the gap between the government’s income and expenditure. At the same time, he may well come good on the survey’s promise to rationalise food, fertiliser and oil subsidies.
A spike in fiscal deficit, if it pays off old unrecognised subsidy debts and an increase in infrastructure spending, could satisfy global credit rating firms who have threatened to downgrade India’s investment grade rating.
Said D.K. Joshi, chief economist with Crisil: “A 4.5 per cent fiscal deficit, if credible and arrived in a correct manner, is perhaps better … the target should be feasible.”
The survey speaks of implementation of Central GST (CenGST) as a “first step towards GST”. The government may have realised it would be difficult to persuade non-BJP-ruled states to accept a tax reform that would unite India into a single market with the possible loss of some revenue.
The new government intends to go ahead with Direct Taxes Code, despite speculation that it might junk it altogether in favour of a completely new law. However, the survey also makes it clear that corporate taxation rates need to be reworked downwards.
Jaitley’s survey marks out agriculture as a major area of reform, promising to dismantle the Mandi act which disallows farmers from selling their produce directly to consumers. “A national market for food is yet to develop,” the economic survey laments.
The survey suggests that Parliament has the right to legislate a national market under the constitution “which gives it the ability to legislate the freedom to buy and sell, for farmers and traders, across state lines. This law can override state APMC Acts and restrictions” and turn the mandis into just another way of doing business and not the sole monopoly way of selling produce.
The government also plans to overhaul financial laws with talk focusing on a draft Indian Financial Code.