Align fuel prices with global trend, cut subsidy

Survey reiterates commitment to fiscal consolidation

The Economic Survey on Wednesday said the fiscal deficit slippage for 2012-13, as a proportion of gross domestic product (GDP), would be restricted to 0.2 percentage points, with action on expenditure offsetting the shortfall in revenue collection.

This indicates the government might be able to show it meet the revised target of 5.3 per cent to GDP when it tables the Budget figures in Parliament tomorrow.

The Survey said controlling the expenditure on subsidies would be crucial for fiscal consolidation. It said the prices of petroleum products, particularly diesel and liquefied petroleum gas (cooking gas), needed to be aligned with global fuel prices.

"It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of the large unmet development needs," conceded the Survey.

In the mid-year economic analysis in December, Chief Economic Advisor Raghuram Rajan had said achieving the deficit target of 5.3 per cent of GDP would be challenging, with the possibility of subdued collection of taxes, receipts from telecom spectrum auction and disinvestment, plus a higher subsidy burden.

In the Budget proposals presented last year, the finance ministry had estimated the Centre's fiscal deficit at 5.1 per cent or Rs 513,590 crore for 2012-13. After assuming charge as minister in August,

P Chidamabaram admitted there would be some slippage on this but assured the deficit would not cross 5.3 per cent.

After the global financial crisis and the subsequent slowing aggregate demand, there was fiscal stimulus injection in 2008-09 and 2009-10. So, the deficit rose to six per cent and 6.5 per cent, respectively, for these two years.

In 2010-11, fiscal consolidation resumed and the government managed to keep it at 4.8 per cent, a tad lower than the estimate of 4.9 per cent. The momentum could not be sustained in 2011-12, as growth faltered, and the fiscal deficit in 2011-12 was 5.7 per cent against the government's projections of 4.6 per cent.

  It is now targeting a fiscal deficit of 4.8 per cent in 2013-14 and, thereafter, a correction of 0.6 percentage points every year, to take it to three per cent in 2016-17. The Survey reiterated this government commitment. This, it said, with demand compression and more agricultural production should lead to lower inflation, giving the Reserve Bank the needed flexibility to reduce policy rates and, hence, lead to more investment and growth.

The Survey referred to the controversial provision of the General Anti-Avoidance Rules on taxes, since deferred by two years, as a measure aimed to widen the direct tax base.

It said in an environment of moderate rates of tax, it was necessary that the correct tax base be subject to tax, in the face of aggressive tax planning and use of opaque low tax jurisdictions for residence as well as for sourcing capital.