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The Survey, prepared by Chief Economic Advisor Raghuram Rajan, said controlling expenditure on subsidies would be crucial for fiscal consolidation. It said domestic prices of petroleum products, particularly diesel and liquefied petroleum gas (LPG), need 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 large unmet development needs,” pointed out the Survey tabled in Parliament today.
In the Mid-Year Economic Analysis in December 2012, Rajan had admitted achieving the target of 5.3% would be a challenging task given the possibility of subdued tax collections, receipts from 2G spectrum auction and disinvestment, and a higher subsidy burden.
Fiscal deficit so far this year is 78.8% of the Budget Estimate, which is below the five-year average of 85.9% last year’s level of 92.3%.
In the last Budget, the finance ministry led by Pranab Mukherjee had estimated the Centre’s fiscal deficit at 5.1% or Rs 5,13,590 crore for 2012-13. After assuming charge as finance minister in August, P Chidamabaram admitted there would be some slippage but assured the deficit would not cross 5.3%.
As growth slowed and government revenues did not keep pace with the spending, fiscal deficit in 2011-12 stood at 5.7% against the government’s projections of 4.6%.
After the global financial crisis and the slowdown in aggregate demand that followed, fiscal stimulus was injected in 2008-09 and 2009-10 and consequently the fiscal deficit increased to 6% and 6.5%, respectively.
In 2010-11, however, fiscal consolidation resumed and the government managed to keep it at 4.8%, a tad lower than the estimate of 4.9%. The momentum could not be sustained in 2011-12 as growth faltered.
The government is targeting a fiscal deficit of 4.8% in 2013-14 and thereafter a correction of 0.6 percentage points every year to take the fiscal deficit to 3% in 2016-17.
The survey reiterated the government commitment, saying this along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates and hence to investment and growth.
The survey mentioned about the controversial provision of the General Anti-Avoidance Rule (GAAR), which has now been deferred by two years, as a measure aimed at widening the direct tax base.
It said in an environment of moderate rates of tax, it is 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.
“However, in view of the apprehensions raised about the Rules and the recommendations of the Shome Committee, the provisions have been deferred.”
