A day ahead of the second quarter monetary policy review by the Reserve Bank of India (RBI), Finance Minister P. Chidambaram, on Monday, unveiled a five-year roadmap for fiscal consolidation in keeping with the Kelkar Committee recommendations to contain the twin deficits and high inflation, spur investments and put the economy back on a higher growth track.
Making a statement at a press conference here to mark acceptance of a number of reform measures in taxation, disinvestment and expenditure recommended by the Kelkar panel, which had cautioned the government that a “business-as-usual scenario for the current year” might lead to the fiscal deficit rising to 6.1 per cent of GDP [gross domestic product], Mr. Chidambaram asserted that efforts would be continued to restrict the fiscal deficit to 5.3 per cent of the GDP this fiscal, and reduce it to 3 per cent over a five-year period in 2016-17.
Referring to the lower fiscal deficit target that was set in the Budget for 2012-13, Mr. Chidambaram said: “5.1 per cent was very challenging. After looking at all the factors, we think 5.3 per cent is doable, and we intend to work hard and achieve that.”
As per the roadmap, the deficit is to be brought down to 4.8 per cent by 2013-14, to 4.2 per cent in 2014-15 and further to 3.6 per cent in 2015-16 and finally to 3 per cent per cent in 2016-17.
“This plan is necessary, this plan must be implemented and the government is very serious about implementing this fiscal consolidation plan…As fiscal consolidation takes place and investors' confidence increases, it is expected that the economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability,” he said.
The timing of the announcement is significant, in that it is quite evident that the government would like the RBI to heed India Inc.’s demand, and ease its key policy rates to kick-start the economy by reviving demand and catalysing investment. While it remains to be seen whether the apex bank responds to the government’s fiscal action or waits for the measures to take effect in view of the persistently high inflation, Mr. Chidambaram gave a clear indication that the government would welcome reciprocal action in view of the deceleration in industrial and overall economic growth.
Without referring to the RBI, Mr. Chidambaram said: “Well, I am making the statement so that everybody in India acknowledges the steps which we are taking. And also acknowledges the government is determined to bring about fiscal consolidation. And I sincerely hope that everybody will read the statement and take note of that...”
In his statement, Mr. Chidambaram pointed out that among the reform measures recommended the Kelkar panel strongly advocated a transition to the Goods and Services Tax (GST), a quick review of the Direct Taxes Code (DTC) before its introduction and passing in Parliament and a number of administrative measures to improve tax collection. On disinvestment, it suggested a number of new models for disinvestment and has pitched for disinvestment of the government’s residual stake in some companies that were privatised earlier. On the expenditure front, it suggested rationalisation of schemes, and strict control and monitoring of expenditure.
“These recommendations are wholesome and have been accepted by the government,” he said.
Expressing confidence that the government would be able to mop up Rs.30,000 crore from disinvestment and Rs.40,000 crore from sale of spectrum, Mr. Chidambaram stressed that every effort would also be made to realise the revenue budgeted under tax receipts. “The government also expects to be able to contain and economise on expenditure, both on Plan and non-Plan side. While funds will be made available for essential expenditure, especially capital expenditure, every effort will be made to avoid parking or idling of funds. As regards subsidies, the Government will also increasingly rely on Aadhaar-enabled direct cash transfers of merit subsidies to eliminate duplication or falsification,” he said.
The Finance Minister also expressed the government’s firm resolve to address the challenges posed by the rising current account deficit (CAD). The CAD, he said, was expected to come down to $70.3 billion or 3.7 per cent of GDP in the current fiscal, from $78.2 billion or 4.2 per cent in 2011-12. “The government is confident that the CAD will be fully financed by capital inflows, and expects that a substantial part of it will be in the form of foreign direct investments, foreign institutional investments and external commercial borrowings ,” he said.
As for the reforms in direct and indirect tax laws, Mr. Chidambaram said the introduction of the amended Direct Taxes Code (DTC) Bill was under review and would be presented to Parliament after taking the recommendations of the Standing Committee into account.
“A quick review of the DTC Bill will be done. We are looking at the Bill that was introduced, at the Standing Committee's recommendations. We are also looking at current economic situation and therefore final version of bill that will be introduced in Parliament will reflect all these. By and large, we will have to abide by Standing Committee recommendations,” he said. Alongside, work is in progress on the Goods and Services Tax (GST).
