Government’s fiscal stance will from now on dominate economic action as monetary policy takes a backseat with inflation softening, according to a leading economist associated with the government.

More than monetary policy, it is the fiscal policy stance that is going to be difficult for the government in the New Year, said M Govinda Rao, member of the five-member Economic Advisory Council to the Prime Minister.

In 2011, RBI will have ?flexibility? in monetary policy making with inflation slowing down, he said ahead of Reserve Bank Of India’s (RBI) final policy review of this calendar year on Thursday. Meanwhile, it will be ?the fiscal situation that is going to be difficult to handle, posing a major problem,? Rao said.

The challenges facing the fiscal authorities included a burgeoning deficit that must be cut three percentage points of the GDP by 2015, he pointed out. This fiscal year, the combined fiscal deficit of the central and state governments is estimated at 8.5% of the GDP, which is above 5.4% of GDP goal for achievement by 2015, according to the 13th Finance Commission, Rao said.

Government had to find resources equivalent of 3% of GDP to finance the deficit, commitments under its social programmes such as food security and education for all, and health expenditure, said Rao, who is also director of the reputed National Institute of Public Finance and Policy in New Delhi. This year, fiscal consolidation was easy because government’s coffers were boosted by higher tax revenues on the back of a sharp rebound in growth and over Rs 1 lakh-crore bonanza from sale of spectrum for carrying 3G and broadband wireless signals.

So in this fiscal, the Centre will reduce fiscal deficit to the projected 5.5% of GDP from 6.7% a year earlier.

And next fiscal year, it might fall to 4.8% of GDP, Rao said.

In the longer term, growth in revenue mobilisation will not be easy, Govind Rao said, noting the delay in implementing the landmark taxation reform, the goods and service tax spelt trouble for the government.

Rao said in the long term, fiscal problems have to be solved through garnering more revenue through tax reforms.?It is unfortunate that the process to reform indirect tax has got stalled,? he said. ?GST was the only hope for fiscal consolidation in the medium term without derailing social and infrastructure spending,? he said.

It was unrealistic to expect significant increase in revenue from direct taxes as direct tax-to-GDP ratio had doubled to 6.5% in last four to five years.

Balancing act

Measures taken by RBI governor D Subbarao from April, 2010