The latest data on the fiscal situation released by the Controller General of Accounts (CGA) on Tuesday does not portend well for the government’s stated objective of holding the fiscal deficit within reasonable limits. For most of the past two years the macroeconomy has been beset with twin deficits — the fiscal deficit and the current account deficit. During the first half of the year the current account deficit (CAD) appeared to be spinning out of control with all projections going awry. The deleterious consequences were felt across the macroeconomy. The rupee declined and inflation remained persistently high. However, a surprisingly strong rebound in exports and some innovative government measures to shore up the external account, along with tariff and non-tariff measures to restrict gold imports, have helped narrow down the CAD within reasonable limits, The expectation is that by March 31 the CAD will be well below 3 per cent of GDP, a figure which even the most optimistic forecasters would not have imagined just a few months ago. While the threat from a burgeoning CAD might have receded — though by no means has it been eliminated — the government’s fiscal problems have come to the fore.
The challenge of containing the fiscal deficit has persisted with successive governments. No Finance Minister, however, has articulated the problems arising from runaway fiscal deficit as strongly as P. Chidambaram. He has often said that the “red line” for the fiscal deficit, which he set at containing it within 4.8 per cent of GDP, will not be breached. That is going to be a particularly daunting task in the light of the latest CGA data, according to which the fiscal deficit in the first eight months of the current fiscal year (April-November) at 94 per cent was already close to breaching the full year’s target. Total expenditure during the first eight months was at 61.3 per cent of the whole year’s budget, higher than the 58.2 per cent in the previous year. Revenue collections have remained constant at a little over 47 per cent. The urgent task therefore is to prune expenditure while trying to boost government revenues, especially tax revenues. Expenditure control, always a tough task, is even tougher in an election year. The axe is bound to fall on Plan expenditure and that in turn will have a negative impact on the growth momentum. Tax revenues are directly dependent on GDP growth. There again, with the economy unlikely to grow much above 5 per cent during the current year, the outlook for higher tax collections and hence a lower deficit is by no means positive.