The Hindu : Centre, States warned against adverse impact of rising deficit

Online edition of India's National Newspaper
Tuesday, Sep 30, 2003

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Centre, States warned against adverse impact of rising deficit

By Our Special Correspondent

NEW DELHI SEPT. 29. The Chairman of the 12th Finance Commission, C. Rangarajan, today warned against the adverse impact of the rising fiscal deficit of the Centre and the States on debt, developmental expenditure and growth of the economy.

Addressing a seminar organised by the National Institute of Public Finance and Policy on the issues before the 12th Finance Commission, Mr. Rangarajan said the fiscal deficits of the Centre and the States need to be brought down in a calibrated manner by augmenting revenues and pruning expenditures. "The adverse impact of a large fiscal deficit on the economy should not be under-estimated," he said, pointing out that the combined fiscal deficit was more than 10 per cent in 2002-03, compared to 8.8 per cent in the late 1980s.

While the Tenth Plan envisaged a fiscal deficit of 6.8 per cent of the gross domestic product (GDP) during 2002-07, the 11th Finance Commission had pegged it at 6.5 per cent as the `desirable target' to be achieved by 2004-05. A burgeoning fiscal deficit may lead to arise in debt, increasing interest payments, fall in developmental expenditure and the consequent impact on growth rate, Mr. Rangarajan said. Referring to the 11th Finance Commission's target of 7-7.5 per cent growth in the last three fiscal years, he said the country could achieve only 4.0, 5.6 and 4.4 per cent GDP growth, respectively.

Pointing out that the revenue deficit of the Centre and the States had increased to over 7 per cent in 2001-02 from 6.3 per cent in 1999-2000 and 3.6 per cent in 1994-95, he said with current trends indicating continued deterioration, the situation was likely to further worsen by 2004-05. "During the last 15 years, the tax-GDP ratio fell by 1.9 per cent from 16 per cent in 1986-87, and was estimated to be 14 per cent in 2003-04. The decline in tax-GDP ratio was due to fall in revenues from indirect taxes-GDP ratio by 2.8 per cent, which could only partially be compensated by the rise of 0.9 per cent in direct tax-GDP ratio," he said.

The combined revenue spending of the Centre and the States increased by 1.43 per cent to 22.9 per cent of the GDP during 1998-2001, particularly because of the rising interest and pension payments since the late 1980s. For fiscal sustainability, what was required was a rise in fiscal deficit to be matched by a rise in the capacity to service the increased debt, he said. Instead of coming down, the debt-GDP ratio increased to 76 per cent in 2002-03 from 65 per cent in 1999-2000.

Mr. Rangarajan underscored the fact that about 70 per cent of the Government's borrowings were spent on areas other than capital assets, which resulted in lower returns. "The high level of fiscal deficit combined with the rising debt-GDP ratio has led to fall in the aggregate Government demand net of transfer payments," he said, adding that some hard decisions were required to arrest rise in the debt:GDP ratio. "Fiscal policies will have to be restructured to facilitate acceleration in growth with macro-economic stability. Public spending on roads, water supply, power, primary education and health need to be stepped up," he added.

Urging the Government to strike a balance between public expenditure and containing fiscal deficit, he said a failure to step up such expenditure would dampen growth momentum.

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