FRBM targets are vital

Mumbai, Aug 30 | Updated: Aug 31 2006, 05:30am hrs
With the countrys outstanding debt shooting over the roof thus curbing government spending in social sectors, the Reserve Bank of India (RBI) has said that maintaining fiscal discipline is critical for overall stability of the economy.

RBI has said that the countrys outstanding debt is substantially high by international standards and is in turn creating obstacle for government spending in social sector. Thus maintaining fiscal discipline would be critical for macroeconomic, financial, external sector and budgetary sustainability.

In its annual report for the year 2005-06, the RBI has said The persistence of large fiscal deficits in the past has resulted in accumulation of outstanding debt which is substantially high by international standards. The interest burden of the government, therefore, continues to be high constraining the governments ability to increase social sector and other productive outlays.

The RBI has further said that the budgetary implications of issuance of oil bonds, outlays on the National Rural Employment Guarantee Scheme and revenue implications of special economic zones also need to be factored.

In this context the banking regulator said Adhering to the Fiscal Responsibility and Budget Management (FRBM) targets in respect of fiscal deficit and revenue deficit is, therefore, critical for macroeconomic, financial, external sector and budgetary sustainability.

Furthermore the RBI has cautioned that any deviation from the FRBM targets will have both national and international repercussions in terms of credibility.

The apex bank has said that larger deficit reductions in 2007-08 and 2008-09 will be required to meet the FRBM targets. Given that revenue expenditure has remained broadly stable in the last decade and a half, and non-tax receipts continue to be sluggish, the scope for deepening fiscal empowerment lies in improving tax revenue. This would require concerted efforts in substantially improving the tax/GDP ratio through further widening of the tax base and severe curtailment in tax exemptions.