To get rate cut, Chidambaram offers deficit cut

In a surprise move, finance minister P Chidambaram unveiled a plan to halve India’s fiscal deficit (or excess government expenditure over income) to 3% through a five-year (2012-17) plan, but did not detail any concrete steps.

Experts viewed this as an attempt by North Block to put pressure on the Reserve Bank of India to cut interest rates at its monetary policy review on Tuesday.

The government’s fiscal deficit stood at 5.9% of GDP last fiscal (or Rs 5.22 lakh crore) and could rise to well over 6% this fiscal, according to various estimates, because economic slowdown has reduced its income through taxes.

The finance ministry is banking on policy measures such as goods & services tax, the direct taxes code, direct transfer of subsidies through the Aadhar platform to curb subsidy leakages, and divestments to attain the 3% mark.

Chidambaram, however, did not reveal any plan to reduce subsidies – on food, fertilisers and fuel --which are the key reason for the country’s monster deficit.

“That’s because it’s too dangerous politically as the country goes into election mode next year,” said an analyst.

“In our view, the measures announced will be insufficient to contain the fiscal deficit at 5.3% of GDP in this fiscal due to higher subsidies and lower tax revenues,” economists at Nomura Securities said.

Chidambaram said the Kelkar Committee has cautioned that a business-as-usual scenario for the current year may lead to the fiscal deficit rising to 6.1% of GDP. “This,” he said, “is totally unacceptable.”

But government officials made it clear that all subsidies cannot simply be eradicated, and the particular class may have to take pains so that the others do not suffer.