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Fiscal deficit: A cause for concern

February 26, 2003 17:32 IST

In 2001-02, the government managed to achieve a fiscal deficit of 5.3 per cent of gross domestic product, higher than the estimated target of 4.7 per cent.

For the current fiscal of 2002-03, the finance minister aims to achieve a target of 5.3 per cent of the GDP.

The good news is that India's fiscal deficit, as a percentage of the GDP, has been falling continuously. It has come down from a high of 7 per cent in 1990-91 to 5.7 per cent in 2001-02.

The lowest fiscal deficit figure in the last decade was in 1996-97 at 4.1 per cent.

In 1991-92, the fiscal deficit fell considerably to 5 per cent, but jumped in the next two years to touch 6.4 per cent in 1993-94.

From then on, the fiscal deficit figure has been on a downswing. In 2001-01, the figure stood at 5.1 per cent, despite pressures on public finances on account of deceleration in the divestment programme, natural calamities and the relief to consumers of petroleum products.

Ironically, in every single Budget, the finance ministers have been pressing the need to reduce fiscal deficit. The Common Minimum Program of the United Front government had earlier made a solemn promise to reduce the fiscal deficit to 4 per cent. The BJP-led alliance also showed its earnestness in trying to garner more resources.

But clearly, there is a lack of motive power to make the deficit in finances move out of the path of India's progress.

Fiscal consolidation is important to ensure that India reaches its 8 per cent growth target.

Despite major economic improvements in the 1990s, which led to one of the highest rates of economic growth over the past 10 years, India's growth can suffer if the fiscal situation is not addressed.

The International Monetary Fund has also expressed its concern about India's looming fiscal deficit position and has urged the government to implement economic reforms.

To handle the fiscal deficit situation, the IMF has asked the authorities to strengthen tax revenues and introduce a state-level value-added tax.

According to the IMF, an annual reduction in India's consolidated government primary deficit of 1.33 per cent of the GDP for the next five years is necessary to reduce fiscal deficit and the general government debt to 60 per cent of GDP by 2011.

The Fiscal Responsibility and Budget Management Bill, introduced in the Lok Sabha, in December 2000, provides for a reduction of 0.5 per cent in revenue deficit every year.

With this, the fiscal deficit, which currently stands at 5.7 per cent, will reduce to 2 per cent of GDP by March 2006.

However, in February 2003, the Union Cabinet watered down the Bill by deciding to delete its key provisions, including reduction in fiscal deficit.

YearFiscal deficit
2001-02 5.7
2002-03 (B.E)5.3

Run-up to the Budget 2003

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