New Delhi, Feb. 27: The country's fiscal deficit must not careen past the current levels and the government should adhere to the medium-term target of 3 per cent of the gross domestic product (GDP), the Economic Survey for 2014-15 said.

A reduced deficit creates the fiscal space to protect against downturns, the survey added.

In this fiscal, the survey said, the government would not overshoot its target of 4.1 per cent of GDP. However, it should borrow to finance investment and not fund current expenditure

Fiscal deficit is the gap between government's total expenditure and revenue and some capital receipts.

"India must meet its medium-term fiscal deficit target of 3 per cent of GDP. This will provide the fiscal space to insure against future shocks. The recommended strategy would also take India closer in fiscal performance to that of its emerging market peers," the document tabled by finance minister Arun Jaitley said.

The recent hike in excise duty on diesel and petrol, reduced subsidies and expenditure compression will help the government to stick to the challenging fiscal deficit target of 4.1 per cent of GDP despite weakness in revenue collection and delayed divestment.

Ranen Banerjee, partner, public finance and urban development of PwC India, said the survey indicated that "much larger fiscal headroom was becoming available to the government on account of expected growth in the economy, lower oil prices, and better targeting of subsidies".

The pre-budget document said the deficit target of 4.1 per cent for 2014-15 "will be met... Should the revenues not pick up sufficiently, there would be a need to persist with some compression in expenditure so as to meet the target... going forward enhanced revenue generation will be a priority".

For April-December 2014, the fiscal deficit stood at Rs 5.32 lakh crore, which is 100.2 per cent of budget estimates and higher than the last five years average of 77.7 per cent.

"We expect the finance minister to stick to the path of fiscal consolidation and strive for a fiscal deficit target of 3.6 per cent of GDP in 2015-16 along with a strong emphasis on the quality of adjustment and economic reforms," Yes Bank said in a report.

Subsidy

The survey called for the rationalisation of subsidies as those on food, fuel, railway, fertiliser and others amount to a staggering Rs 3.77 lakh crore, or 4.24 per cent of GDP, but reach only a few of the targeted poor.

"Price subsidies are regressive. By regressive, we mean that a rich household benefits more from the subsidy than a poor household," the survey said.

It made a strong pitch for cutting back price subsidies by using technology as a means to plug leakages. Direct cash transfers, if targeted well, are capable of boosting household consumption, asset ownership and reduce food security problems of the ultra-poor households.

Price subsidies have formed an important part of anti-poverty policies in India but have not transformed the lives of the poor and such policies may not be the best weapon in the fight against poverty, the survey said. However, eliminating or phasing out subsidies is neither feasible nor desirable, the survey observed.

"The survey recommends the use of technology along with Aadhar and Jan Dhan for direct benefit transfer. It expects the JAM Number Trinity - Jan Dhan Yojana, Aadhaar and mobile numbers - to be a game changer because it expands the set of welfare and anti-poverty policies that the state can implement in the future," Sunil Kumar Sinha, principal economist and director - public finance, India Ratings said.

Pointing out the loopholes in the current subsidy regime, the survey said the government spent Rs 1,29,000 crore on food subsidy whereas 54 per cent of wheat, 48 per cent of sugar and 15 per cent of rice allocated under the public distribution system are lost in leakages.

Similarly, the government spent close to Rs 74,000 crore on fertiliser subsidy. "Urea manufacturers derive most economic benefit from the subsidy," it said.

Though the government has started direct benefit transfer for LPG subsidy, the document said the bottom 50 per cent of households only consume 25 per cent of LPG.

The survey has pointed out similar loopholes in the railways, kerosene, pulses, electricity and water.