Economic Survey: Govt calls for fiscal consolidation

NEW DELHI Thu Mar 15, 2012 3:09pm IST

Labourers erect a temporary shelter for Hindu devotees ahead of Magh Mela festival in Allahabad December 1, 2008. REUTERS/Jitendra Prakash/Files

Labourers erect a temporary shelter for Hindu devotees ahead of Magh Mela festival in Allahabad December 1, 2008.

Credit: Reuters/Jitendra Prakash/Files

NEW DELHI (Reuters) - The government needs to boost tax revenues and cut expenditure to rein in a burgeoning fiscal deficit and help cool inflation pressures and bolster longer term growth, the government said in a survey on Thursday, a day before the annual budget.

New Delhi is expected to miss this fiscal year's deficit target of 4.6 percent of GDP by a wide margin, and it faces a difficult task to cut a soaring subsidy bill and revive slowing growth.

A yawning fiscal shortfall is not only making credit dearer for private investment, it is also foiling the central bank's efforts to control inflation.

The Reserve Bank of India left interest rates unchanged on Thursday, warning of resurgent inflation risks from surging crude oil prices, fiscal slippage and rupee depreciation.

(Read: RBI keeps interest rates unchanged, click here)

"While an expanded deficit can boost consumption and economic growth, this is medicine akin to antibiotics. It is very effective if properly used and in limited doses, but can cause harm if used over a prolonged period," the economic survey by the finance ministry said.

It suggested an increase in tax rates to boost tax-to-GDP ratio to 13 percent by 2016/17 from 10.5 percent currently. It also favoured a cap on the fuel subsidy, which has already topped 536 billion rupees this year -- more than double the target for 2011/12.

The recommendation comes at a time when Prime Minister Manmohan Singh's government is facing a political storm for raising railway passenger fares on Wednesday for the first time in eight years.

In a country where populist policies are often rewarded with electoral gains, any decision to tinker with subsidies and tax rates could test the Congress party-led ruling coalition's political nerve.

Finance Minister Pranab Mukherjee is widely expected to unveil measures to trim the fiscal gap when he presents the annual budget. But much will depend on the government's resolve to cut its subsidy bill.

The economic survey said a lower fiscal deficit will help investments to rebound quickly.

Economic growth faltered to a three-year low of 6.1 percent in the December quarter following a contraction in investment, and the pace of economic expansion this fiscal year is forecast to dip below 7 percent for the first time in three years.

Capital investment has dropped to 30 percent of GDP in the fiscal year ending on March 31 from 32 percent a year ago.

The economic survey, however, forecast a pick up in the economy in 2012/13 as it expects fiscal consolidation along with lower inflation will help investments recover.

It expects annual economic growth to be about 7.6 percent in 2012/13 and 8.6 percent in the year after.

(Writing by Rajesh Kumar Singh; Editing by Ranjit Gangadharan)

FILED UNDER:

Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage