Targeted fiscal deficit may be reduced: Rangarajan

There is a fair possibility that the targeted fiscal deficit of the states may be reduced during this year, C Rangarajan, chairman of Economic Advisory Council to the Prime Minster and chairman of the Twelfth Finance Commission, said.

Inaugurating a three-day seminar on 'Fiscal Responsibility and Intergovernmental Transfers' here on Wednesday, he said that the annual budgets presented by all states for the year 2005-06 indicate that there is going to be an appropriate reduction in aggregate fiscal deficit as proportion of GDP.

The revised budget estimates for the year 2004-05 put the fiscal deficit at 3.8 per cent as compared to the projected fiscal deficit of 3 per cent for the year 2005-06. The annual budgets of the states indicate further reduction of the fiscal deficit to the projected level according to him.

"Achieving an annual growth rate of 7 to 8 per cent is very much within our grasp. However, growth to be sustained over a long period has to be within a framework of fiscal prudence and consolidation," he said while emphasising on fiscal responsibility.

Explaining the approach adopted by the Twelfth Finance Commission in achieving the objectives of fiscal consolidation via transfers, he said the efforts needed to achieve fiscal consolidation must be seen as the joint responsibility of the central and state governments.

"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 the states need to raise the levels of revenues relative to their respective revenue bases, exercise restraint in undertaking unwarranted expenditure commitments and prioritising expenditures," he said.

He also said that the states are set to get about Rs 3,000 crore more from the Centre over the projections of the Twelfth Finance Commission as central revenues are expected to be more buoyant this year.

Ashok Lahiri, chief economic advisor, Government of India, said there is a need for harmonising the policies of the Centre and the states as growth, inflation and performance of the economy depend on the combined operation of all levels of government.

Chief minister Y S Rajasekhara Reddy, who addressed the inaugural session of the seminar, reiterated his government's firm resolve to continue this prudence in the fiscal management.

However, he appealed to the economists to come out with a proper definition of capital and revenue expenditure so as not to inhibit the expenditure on the social sectors.

"Any neglect of social sectors which include welfare measures, will put the very democracy in serious peril," he said.

While welcoming the move of several states, including Andhra Pradesh in bringing in the fiscal responsibility legislations to ensure healthy economic practices, Michael Carter, country director of the World Bank, said that the same political commitment is also required in the implementation of these measures.

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