While endorsing continuation of fiscal stimulus in this year, the Economic Survey 2008-09 suggested a number of reform measures to achieve fiscal consolidation over long term. The Survey stated that the fiscal deficit target should be set at 3% at the earliest, possibly by 2010-11. The fiscal deficit stood at 6.2% in 2008-09, the survey pointed out, as against 6% targeted in the Budget. The Fiscal Responsibility and Budget Management Act mandates the government to reduce fiscal deficit by 0.3% cent every year to bring it down to 3% of GDP by 2008-09.
The government?s annual report card for the economy also pitched for an ambitious target of achieving zero fiscal deficit on a cyclically adjusted basis. Market participants decided to wait till the Union Budget 2009-10 is presented in Parliament on Monday. But some analysts now project that the deficit numbers may be more benign for this fiscal and that the government may raise its borrowing requirements by less than Rs 20,000 crore. The survey suggested a series of reform measures to raise
revenue and cut expenses such as deregulating petrol and diesel prices at earliest, streamlining petroleum, fertiliser, food subsidies to reduce leakages, reviving disinvestment plan to generate at least Rs 25,000 crore annually. It also suggested the government to set up an independent debt management office that will manage government?s borrowings plans. Currently, the Reserve Bank of India manages government debt programme, besides handling its core function of monetary management. The Union Budget for 2007-08 had proposed separation of debt management function from monetary management.
Fiscal deficit to GDP ratio for 2008-09 is at 6.2%, while the revenue and primary deficit are estimated to be 4.6% and 2.6%, respectively, the survey said. ?The fiscal measures taken together provided a fiscal stimulus of about 3.5% of GDP. Further, below the line items can also be said to have contributed a stimulus of about 1.3% of GDP, even though these merely offset the effect of the increase in the prices of oil and fertilizer imports on domestic income and demand,? it said.
?The market seems to be getting split down the middle on the expectations from the Union Budget so far as borrowing numbers are concerned. While a segment of the market continues to expect a 6.5-7.0% fiscal deficit, there is now another camp that expects fiscal deficit being more moderate at 5.7-5.8%. We are in the second camp and expect the additional borrowing to be restricted to only Rs 17,000 crore to Rs 20,000 crore, mainly on account of more revenues from non-tax sources of 3-G auctions and disinvestments,? Kotak Mahindra Bank said in a research note on Thursday.
Yield on the most traded 2021 government bond ended at 7.12%, from previous close of 7.23%, as the market hoped the government borrowing will not be as high as expected earlier, but traders remained cautious ahead of Monday?s Budget. The benchmark 6.05% 2019 bond was not actively traded.
On the suggestion of zero fiscal deficit, the survey said the government should assess the possibility of having a new target of entirely eliminating fiscal deficit, but with flexibility that it could be widened at a time of economic downturn. ?The prescription will not rule out the possibility of fiscal expansion during the period of slow down, but in the normal conditions it wants the government?s account in balance,? said HDFC Bank economist Jyotinder Kaur said.
The survey also highlighted improvement in fiscal health of state governments over the last five years. ?On the strength of relatively better performance by states and also the record of the Centre, combined gross fiscal deficit of the Centre and states fell from a level of 8.4% of GDP in 2003-04 to a level of 5.2% of GDP in 2007-08,? it said.
Up to debt
•Fiscal deficit for 2008-09 is at 6.2% while the revenue and primary deficit are estimated to be 4.6% & 2.6%, respectively
•Analysts project that the deficit numbers may be more benign for this fiscal
•The government may raise its borrowing requirements by less than Rs 20,000 crore