Centre should target 3% fiscal deficit, overhaul subsidies regime

The Survey for 2014-15 has diagnosed the daunting challenge for the Centre in maintaining fiscal discipline while boosting public investments to revitalise growth.

The advice from the Survey is not to go in for excessive belt-tightening, which could affect public investments and thereby hurt growth.

The Centre would do well in not going in for “accelerated fiscal consolidation” in its budget for 2015-16 to be presented on Saturday, the Survey has said.

This should be the case even while not lifting its sight away from the medium-term fiscal deficit target of 3 per cent.

As for the current fiscal, the Survey has highlighted that the fiscal deficit target of 4.1 per cent will be achieved.

This would be possible largely due to the sharp fall in global crude oil prices from $106.30 a barrel in July 2014 to below $50 a barrel in January 2015.

The need for “accelerated fiscal consolidation”— more of belt-tightening — for 2015-16 has lessened because macroeconomic pressures have significantly abated with the dramatic decline in inflation and turnaround in current account deficit, according to the Survey.

However, expenditure control and expenditure switching — from consumption to investment — in the Union Budget on Saturday and in the medium term will be the key. Also, going forward, revenue generation should be a priority.

An overhaul of the subsidy regime will be a centrepiece of the expenditure compression strategy that could help the Government achieve its medium-term fiscal deficit target of 3 per cent of GDP.

Overhauling the subsidy regime should entail further reducing fuel (kerosene and LPG) subsidies, tackling fertiliser subsidies and moving to Aadhaar-based direct cash transfers of food subsidy and other transfers.

This should pave the way for expenditure rationalisation, the Survey said.

In particular, the Economic Survey has highlighted that rationalisation of food subsidies is still an area where more effort is required.

Recently, the high-level committee for restructuring of Food Corporation of India recommended several measures, including cash transfers to the beneficiaries of the public distribution system.

The Centre’s subsidy bill for 2014-15 is estimated at ₹2.60 lakh crore, which is 2 per cent of GDP.

Food, fuel and fertiliser subsidies account for 95 per cent of this payout. The deregulation of diesel price in October 2014, along with the introduction of direct benefit (subsidy) transfer into the bank accounts of domestic LPG consumers, coupled with the decline in global crude oil prices, will help contain the petroleum subsidy, the Survey has said.

Meanwhile, a research note put out by Bank of America Merrill Lynch said the YV Reddy-led Finance Commission’s recommendations will restrict the budget’s ability to support growth despite the drop in oil prices.

It will constrain Finance Minister Arun Jaitley’s capacity to step up infrastructure investment on Saturday’s Budget speech.

However, it will not pull down infrastructure spend per se as States will disburse the same money.

“On balance we believe the seed of decentralisation sown by the Reddy Finance Commission will deepen growth in the coming years,” the research note said.