Fiscal deficit target can wait, not growth

New Delhi, Dec 25 (PTI) India ended up spending way more
than what it earned in 2008, as a surprise downturn across the
globe forced it to step up expenditure to ensure economic
growth.

As a result, it would miss the fiscal deficit target for
2008-09 by a wide margin. From 2.5 per cent of GDP envisaged
in the Budget, the deficit is now expected to increase to five
per cent of the Gross Domestic Product.

Implementation of the Sixth Pay Commission-recommended
wages for central government staff in September was expected
to leave a dent on the fiscal deficit target, but no one was
quite prepared for what would come later that month.

"Honourable members will note that not only I achieve the
target for fiscal deficit under the FRBM Act, I have also left
for myself some headroom," former Finance Minister P
Chidambaram had said in Parliament while presenting the Budget
in February.

In the second half of September, legendary US investment
banker Lehman Brothers collapsed under the weight of the
housing sector crisis and dug the ground for burial of a good
part of the financial world.

Although Chidambaram had given himself a 0.5 percentage
point legroom on the fiscal deficit front by pegging the
target at 2.5 per cent against 3 per cent of GDP mandated by
the FRBM (Fiscal Responsibility and Budget Management) Act ,
the financial storm made it irrelevant.

"We already have a very substantial stimulus package this
year...two per cent is the fiscal deficit expansion," India's
Chief Economic Adviser Arvind Virmani said.

The government announced a stimulus package that included
a cut in excise duty by four per cent across-the-board and
increase in public expenditure by Rs 200 billion, even as
economic growth moderated to 7.8 per cent in the first half of
this fiscal against 9.3 per cent a year ago.

Industrial output turned negative for the first time in
15 years in October and exports too dipped.

Hard pressed, the government has already sought an
additional Rs 1470 billion from Indian Parliament, as the
first and second batch of supplementary demands for grants,
raising public spending to Rs 9000 billion from Rs 7500
billion originally envisaged in the Budget for 2008-09.

Post-Budget cuts will hit the customs duty by Rs 278.85
billion and excise by Rs 125.9 billion. Slower growth is also
hitting duty collections. Not surprisingly, excise duty mop up
dipped 15 per cent and customs duty 0.8 per cent in November.

Even direct taxes, comprising personal income tax and
corporate tax, nosedived by around 40 per cent, making it
difficult to meet the revised target. Bolstered by substantial
growth in the first two months, the government had raised
direct tax mop up target by Rs 300 billion to Rs 3950 billion
for this fiscal.

In these difficult times, the government found succour in
Nobel Laureate Paul Krugman's words. Quoting Krugman,
Chidambaram said in Indian Parliament that India should not
worry too much about its fiscal deficit overshooting target
for 2008-09.

"It will not be a cause for concern if the fiscal deficit
was to cross 3 per cent of GDP this fiscal," he said.

Krugman also said, "...people who think that fiscal
expansion today is bad for future generations have got it
exactly wrong. The best course of action, both for today's
workers and for their children, is to do whatever it takes to
get this (US) economy on the road to recovery."

FRBM Act, notified in 2004, binds the government to
reduce fiscal deficit by 0.3 per cent and revenue deficit by
0.5 per cent every year so that the former becomes three per
cent of GDP and the latter is eliminated by this fiscal end.

Government has already conceded it would be unable to
meet revenue deficit target. PTI