The Reserve Bank today said containing fiscal deficit this financial year within the budgetary limit could be a challenge for the government.

“Containing fiscal deficit in 2013—14 within the budgetary limit could be a challenge, given the level of gross fiscal deficit during the current fiscal so far,” RBI said in its macroeconomic and monetary developments report released on the eve of the second quarter monetary policy announcement.

The report also noted that a revenue deficit and higher capital expenditure resulted in a gross fiscal deficit of 74.6 per cent of the budget estimate in the first five months of the fiscal, which is the highest in the past five years.

Finance Minister P Chidambaram, who took charge in September 2012, had ensured a massive cut in expenditure, resulting in the fiscal deficit target of 5.1 per cent being met comfortably in FY13. In fact, the final readings stood at 4.9 per cent GDP.

The immediate cause for action the threats of a downgrade of the sovereign rating to non—investment grade.

Chidambaram has been repeatedly stating the 4.8 per cent fiscal deficit target is a red—line that cannot be breached and many analysts are expecting him to push some subsidy payout to the next fiscal.

The budget has pegged an over 19 per cent tax mop—up target while the collection so far has been in low single digit only.

Chidambaram had on October 1 attributed this to front loading of government spending and said non—plan expenditure will be compressed to meet the fiscal deficit target.

The RBI report released today also advised the same, saying “restraining expenditure is necessary for fiscal consolidation.

“Fiscal consolidation with a re—orientation in expenditure from revenue expenditure to investment spending could be growth—supportive as it will also crowd in private investment,” the report said.

The report, while welcoming the introduction of new revenue increasing schemes like the service tax voluntary compliance encouragement scheme, also called for more such steps to avert fiscal slippage.

It further advocated raising the diesel prices to limit oil marketing companies under—recoveries and contain fuel demand, which stood at Rs 10.24 per litre of diesel as on October 16.

The report further said even though the budgetary provision of Rs 10,000 crore is sufficient for the National Food Security Act implementation for this fiscal, there is a likelihood of overshooting the overall food subsidy provision of Rs 90,000 crore, to meet the requirements of the existing targeted public distribution system.

On the new food law, which is being sold as a flagship scheme, the report said, “in subsequent years, implementation of the law could lead to increase the food subsidies depending on how it is rolled out and how other food related schemes are merged with it.”

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