Fiscal deficit of states may be lower

There was a fair possibility that the targeted fiscal deficit of states might be reduced during this year, C Rangarajan, chairman of the Prime Minister's economic advisory council and chairman of the Twelfth Finance Commission, said today.

Inaugurating a three-day seminar on "Fiscal Responsibility and Inter-governmental Transfers" here, he said annual budgets presented by all states for the year 2005-06 indicated the likelihood of an appropriate reduction in the aggregate fiscal deficit as a proportion of the GDP.

The revised Budget estimates for the year 2004-05 put the fiscal deficit at 3.8 per cent compared with the projected fiscal deficit of 3 per cent for 2005-06.

The annual budgets of states indicated further reduction of the fiscal deficit to the projected level, he said.

"Achieving an annual growth rate of 7 to 8 per cent is quite possible. However, a sustained growth over a long period has to be within a framework of fiscal prudence and consolidation," he added.

Explaining the approach adopted by the Twelfth Finance Commission in achieving the objectives of fiscal consolidation via transfers, he said efforts needed towards achieving fiscal consolidation must be the joint responsibility of the Centre and states.

"For achieving the vertical and horizontal balance, consistent with the responsibilities of the two levels of governments in respect of providing public and merit goods and services, both the Centre and states need to raise the levels of revenues relative to their respective revenue bases, exercise restraint in undertaking unwarranted expenditure commitments and prioritsing expenditure," he said.

He also said states were set to get about Rs 3,000 crore more from the Centre over and above the projections of the Twelfth Finance Commission as central revenues were expected to be more buoyant this year. Ashok Lahiri, chief economic adviser, department of economic affairs, said there was a need for harmonising the policies of the Centre and states.

Speaking on the occasion, Chief Minister YS Rajasekhara Reddy reiterated his government's firm resolve to continue this prudence in fiscal management.

However, he appealed to economists to come out with a proper definition of capital and revenue expenditure so as not to inhibit expenditure on social sectors. "Any neglect of the social sector will put democracy in serious peril," he said.

Welcoming the move by several states, including Andhra Pradesh, in bringing about fiscal responsibility legislation to ensure healthy economic practices, Michael Carter, country director of the World Bank, said the same political commitment was also required in the implementation of these measures.

He expressed confidence in the Andhra Pradesh government's commitment to reforms. He lauded the government for making the free-power policy more targeted and said there was no need for further changes in the policy.