Deficit correction to be resumed in 2006-07

Finance Commission used as alibi for giving the 2005-06 targets the go-by.

A combination of increased transfers of Rs 26,000 crore to states because of the report of the 12th Finance Commission and a generous increase of Rs 25,000 crore to meet the needs of the National Common Minimum Programme (NCMP) has ensured the government will miss its fiscal targets under the Fiscal Responsibility and Budget Management (FRBM) Act in 2005-06.

"I was left with no option but to press the pause button vis-à-vis the FRBM Act', Chidambaram said today.

An additional strain during the year can come from revenue receipts being lower than what is budgeted -- the 2005-06 estimates assume a 20 per cent hike in excise revenues. This growth is double of what was achieved in previous years.

The FRBM Act requires reduction in revenue deficit by at least 0.5 per cent and fiscal deficit 0.3 per cent of gross domestic product (GDP) each year.

With a revenue deficit of Rs 95,312 crore and fiscal deficit of Rs 151,144 crore expected in 2005-06, the finance minister chose to overlook the requirements under the FRBM for one year.

The fiscal deficit will be 4.3 per cent of the estimated GDP, which will be 0.1 percentage points less than the required reduction, considering the figure for this year will be 4.5 per cent.

If the FRBM statement presented by Chidambaram last year is considered, the fiscal deficit target for the FRBM is actually 4 per cent. In the case of revenue deficit, the finance minister expects the situation to remain unchanged.

It will stand at 2.7 per cent of the estimated GDP. Last year's FRBM statement said the revenue deficit target for 2005-06 was 1.8 per cent.

"Given a strong growth being experienced by the Indian economy, it is surprising that better progress could not be made. Conversely, it must give rise to worries concerning India's future fiscal performance should growth rates become less favorable," said Standard and Poor's Credit Analyst Ping Chew, Singapore-based head of Asia Sovereign and International Public Finance Ratings group.

The minister's performance under the FRBM Act for the current year gives varying figures for revenue and fiscal deficit for 2003-04.

The minister, in his speech, compared his performance to the revised target for 2003-04, in which case he appears to have more than met the FRBM targets but a closer look at the actuals for the year changes the picture.

The revised revenue deficit for 2003-04 was 3.6 per cent, which is expected to come down to 2.7 per cent during the current year amounting to a reduction of 0.9 per cent.

The revised estimate for fiscal deficit last year was 4.8 per cent of GDP, which is estimated to come down to 4.5 per cent, a reduction of targeted 0.3 per cent.

S&P estimated the combined central and state governments' deficits would amount to 10 per cent of GDP in the near term, causing their debts to rise gradually for the next few years from more than 80 per cent of GDP currently.

S&P said although the fiscal outcome continued to disappoint, a more positive aspect of the Budget was the emphasis given to infrastructure spending and tax reforms.

Likewise, the 21 per cent growth in taxation revenue in 2004-05, and an expected growth of similar proportions this year, must be regarded positively in relation to India's ability to service its debt burden.