New Delhi: India needs to take policy actions, particularly aimed towards containing subsidies, to cap the fiscal deficit at 5.1% of gross domestic product in the current fiscal 2012-13, Prime Minister's Economic Advisory Council Chairman C Rangarajan said, amid the country facing a drought-like situation that makes reining in the subsidy bill tough.
"We should take all the steps that are necessary to ensure that fiscal deficit is at the targeted level of 5.1%. This is going to be very difficult unless we are in a position to contain subsidies. To contain subsidies, particularly petroleum subsidies, and fiscal deficit at 5.1%, policy action is very much required," Rangarajan said at an event Sunday.
India's fiscal deficit in the Apr-Jun period at Rs 1.9 trillion crossed 37.1% of the current financial year 2012-13's budgeted estimate. In the last fiscal, the government overshot its fiscal deficit target by over 100 basis points at 5.7%, as subsidy burden rose and revenue fell short of expectations.
The government aims to cap its total subsidies towards providing discounted commodities at 2% of GDP in the current financial year, against 2.5% in the last fiscal.
However, the government is yet to decide on raising prices of subsidized diesel and cooking gas, even as its has repeatedly said that it is willing to "bite the bullet" on subsidies.
Poor monsoons, crucial for farm dependent Indian economy, and political constraints will most likely prevent the government from raising the fuel prices, leaving the government to pin its hopes on its Rs 300 billion disinvestment program and proposed sale of second generation (2G) mobile telephony radio bandwidth to bridge its fiscal deficit.
In 2010-11, the government had capped the fiscal deficit at 4.7% of GDP, on the back of higher-than-expected realization from auctioning of third generation (3G) and Broadband Wireless Access (BWA) spectrum.
Last week, Finance Minister P Chidambaram said the government will re-evaluate its fiscal deficit target of 5.1% of GDP for the current financial year after the mid-year economic review, depending on its expenses and capital resources.
The government plans to reduce its ballooning fiscal deficit with a mix of reduction in overall expenditure as a percentage of GDP and also by enhancing gross tax revenue, Chidambaram had said, adding "similar steps are expected to be continued in the coming years to contain the fiscal deficit."
The Reserve Bank of India has repeatedly said that the government must control its subsidy bill and ramp up investment by increasing capital expenditures, as it faces the risk of breaching the fiscal deficit target for this financial year.