Rising fiscal deficit following the stimulus packages provided by the government to boost economy is not a cause of worry, said Chief Economic Advisor in the Department of Economic Affairs Arvind Virmani.
“Widening fiscal deficits will provide consumption stimulus and are not a worry,” Virmani said recently at a Kotak Institutional Equities conference call with investors.
With the government providing three stimulus packages to boost the economy reeling under the impact of the global financial meltdown, the fiscal deficit during 2008-09 is estimated to have shot up by 6 per cent of the Gross Domestic Product (GDP) from the original estimate of 2.5 per cent.
For the current fiscal 2009-10, the government is estimating a fiscal deficit of 5.5 per cent, which is likely to be revised once the final budget is presented in July by the new government after the ensuing general elections.
Higher fiscal deficit during 2008-09 can be attributed to several developments, including the decision of the government to provide stimulus to the industry by raising public expenditure and lowering taxes.
Pointing out that high fiscal deficits were the result of a conscious counter-cyclical stimulus, Virmani said most of them were one-time affair in nature to boost spending in 2008-09 and 2009-10, but would have no expenditure burden on 2010-11.
Pointing out that high fiscal deficit would compensate for the lack in demand, Virmani said the size of stimulus package during the current year was likely to be about 3.5 to 4 per cent of GDP.
The size of stimulus package provided by the government during 2008-09 works out to be about 4.6 per cent of GDP.
Noting that the country’s economic growth could be impacted by short-term factors in 2009-10, Virmani said, it could return to full potential during 2011-12.
On the issue of high government borrowing crowding out private funding needs, Virmani said it was for the Reserve Bank to choose the instrument for borrowing. However, he added that “there is a need for unconventional thinking and a change in mindset considering what was happening today was once in a 60-year phenomenon cycle”.
As regards the Fiscal Responsibility and Budget Management Act (FRBM) targets, he said, it was not possible for the government to meet them in 2009-10. This was a natural outcome of the need to give fiscal stimulus, which was a conscious policy choice.
Dispelling apprehensions about inadequacy of savings during economic downturn, Virmani said domestic saving and investment rates had risen sharply over the past five years and “were at a level sufficient to support investment largely from domestic resources”.
Pointing out that recent strong growth was largely investment-driven, he said the problem now was to channel the domestic savings to the investment side. The stimulus spending done for increasing consumption would propel corporate investment and arrest the recent fall in growth, he added.
On the question of rolling back of fiscal deficits, he said it was possible to do it quickly as the tax receipts would go up with rise in economic growth.
Moreover, farm loan waiver and Pay Commission award were one-time expenditures, he said adding the Goods and Services Tax (GST) to be introduced from April 1, 2010, would help in increasing revenue for the exchequer.
Also, he added the GST was expected to be more flexible to GDP growth than the present tax regime.
The medium and long-term tax reforms, Virmani emphasised, were necessary to bridge the gap between deficits and the FRBM targets.
Answering questions on widening trade and current account deficits beyond expectations, he said the adverse impact of global financial turmoil was underestimated and hoped that exports would respond positively to the depreciation of rupee.
