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Higher growth to contain fiscal deficit despite sops

By Alok Mukherjee

NEW DELHI, JAN. 13. The unexpected leap in the growth rate in the economy this fiscal year has allowed the Finance Minister, Jaswant Singh, to play the political hand and dole out excise and customs duty cuts. In any other year, with tax revenues running behind target, such largesse in the last quarter of the fiscal year would have distorted the fiscal deficit of the Government completely out of shape, resulting in an economic crisis and a complete loss of credibility for the Finance Minister.

Against a backdrop of only a 4.3 per cent growth during 2002-03, the Finance Ministry this time did not go public with its anticipated growth projections for 2003-04. Initial estimates, including from international organisations like the International Monetary Fund and the Asian Development Bank, put the growth estimates for the current fiscal year at below 5 per cent and the Government estimate was somewhere near that figure. Consequently, the fiscal deficit target was put at 5.6 per cent of the gross domestic product (GDP).

But the official announcement by the Central Statistical Organisation (CSO) that the second quarter (July - September, 2003) growth in the economy had been a whopping 8.4 per cent led to quick revisions of the annual estimates. The Reserve Bank of India was the first to revise its estimates for the full year to 7 per cent growth, with the possibility of it being even higher. On Monday, the independent think tank, the Centre for Monitoring Indian Economy (CMIE) upped its estimates to 8.2 per cent for the full year, thereby giving ample scope to the Finance Minister to go in for a higher fiscal deficit in absolute terms and still remain within the budgeted target.

According to economic analysts, the tax sops announced last Thursday are likely to cost the exchequer about Rs. 2,500 crores in the last quarter of the current fiscal. But economists say that this estimated revenue loss is unlikely to have any major impact on the fiscal deficit, as the most conservative estimate of 7 per cent growth for 2003-04 would outstrip the effects of such a loss. Therefore, taking into account the tax proposals, another independent think tank, the Investment and Credit Rating Agency has estimated that the fiscal deficit as a percentage of GDP would be around 5.4 per cent, lower than the budgeted deficit of 5.6 per cent. In case the growth rate reaches CMIE levels, the deficit percentage could be even lower.

Another favourable factor for the Central Government has been the debt-swap scheme of the States that saw many States return old high-cost debt to the Centre. While this would mean some loss in terms of interest income, the figures of the Central Government, however, looked much better since recovery of loans and advances till November went over the budget estimates by a staggering 265 per cent. Appropriating this entire amount would have made the fiscal deficit figure of the Centre look much better, but the Government decided to utilise this to repay some of the outstanding loan on account of small savings loans. In the process, it saved on its borrowings and, consequently, on interest outgo.

The Government is also likely to plug another shortfall in revenue receipts. The disinvestment target has fallen way short of target in the last few years, but this year, Rs. 13,000 crores could be made up if the proposed disinvestments in oil giants Gas Authority of India Limited and Oil and Natural Gas Corporation come through this fiscal.

On the whole, the Government's pre-poll gambit, which has got the Opposition screaming, could be pulled off because of a host of favourable factors this fiscal, including the good monsoon, the upturn in manufacturing and continued buoyancy in the services sector. The problem for the Government would arise if these factors do not replicate themselves in the next fiscal.

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