Finance Ministry bats for corrective steps to contain fiscal deficit

Achieving fiscal deficit target appears to be a difficult task owing to the burgeoning subsidy bills

The Finance Ministry on Friday pitched for corrective action to bring down the fiscal deficit, which marks an essential step towards achieving macro-economic stability.

The quarterly review of expenditure trends and receipts document tabled in the Lok Sabha by Minister of State for Finance S. S. Palanimanickam in pursuance of the Fiscal Responsibility and Budget Management Act said, “The challenge before the government lies in...[taking] corrective action to come back to the path of fiscal consolidation’’ and stressed that the return to fiscal consolidation would be “extremely essential from the point of view of macro-economic stability and fiscal sustainability.”

In the wake of the uncertain global environment and its impact on the country’s economic fundamentals over the last couple of years, the fiscal deficit widened from 4.9 per cent of the GDP (gross domestic product) in 2010-11 to 5.8 per cent in 2011-12. Even as the Budget target for the current fiscal has been pegged lower at 5.1 per cent of the GDP, achieving it appears to be a difficult task owing to the burgeoning subsidy bills on oil, fertiliser and food coupled with the poor show on the disinvestment front.

Pointing to the economic downsides, the quarterly review maintained that the uncertain economic situation worked against the targets set and the resultant deceleration in industrial and GDP growth rates also had their impact on revenue by way of tax receipts. The fiscal situation was further aggravated on the expenditure front by way of high oil and commodity prices, which pushed up fuel and fertilizer subsidy bills.

Even as the review stressed the need for improving the tax-GDP ratio which has declined to 10.1 per cent in 2011-12 — an aspect that was also recently flagged by Finance Minister P. Chidambaram — the Ministry now also has the report of former Finance Secretary Vijay Kelkar, which has made recommendations on how to handle the problem as well as suggest a road map for fiscal consolidation.

Direct tax collections

While taking comfort over the rise in direct tax collections in 2011-12, mainly owing to rationalisation of personal income tax slabs and moderation in rates and improved tax compliance, the quarterly review sought to attribute the shortfall in corporate tax mop-up to the economic slowdown in the second half (2011-12), especially during the fourth quarter (January-March) following a decline in profitability and low business expectations.