How Govt undertakes Fiscal Consolidation or Controls Fiscal Deficit?

The government is going into the fiscal consolidation mode next year, which also marks the beginning of the 12th Five-Year Plan (2012-17), fiscal consolidation will be on top of the government's list of items as it is likely to play a significant role in controlling inflation. The Union Budget for 2011-12 placed the fiscal deficit for the year at 4.6% of GDP, lower than the rolling target announced previously. But, so far managed to garner only Rs 1,145 crore via stake sale in the Power Finance Corporation (PFC) and the recent decision of 5% stake sale in ONGC if implemented in this fiscal, it could bring an additional Rs 12,000 crore to the government, which in other way is also less than the estimated target. So, the rising fiscal deficit is another serious threat to the Indian government and will continue to be the important aspect of the annual Budget.

Overall, the fiscal deficit in the first half of current fiscal reached 68% of the Budgeted Estimates (BE), which pegged the deficit at 4.6% of GDP. Given the expected moderation in growth of tax revenues, low prospects that government would meet its disinvestment target, and the additional expenditure proposed under the two Supplementary Demands for Grants, and the compensations to be provided to the OMCs for the under-recoveries, the fiscal deficit for the current fiscal is likely to reach 5.6% of GDP.

Further, as per the key recommendations of the Thirteen Finance Commission (TFC), fiscal deficit should drop to 4.2% in 2012-13 and to 3% of the GDP in 2013-14. The target for FY’12 has already exceeded by almost 1.1%, and on the whole, it will be a challenging task for the finance ministry to bring down the deficit in-line with the TFC’s suggestions in FY’13. Therefore, the budget needs to provide more meaningful measures for responsible fiscal management to make sure that the government is able to achieve and reduce its fiscal deficit target, improve macro-economic management as per the Fiscal Responsibility and Budget Management Act 2003. Further, with slowing economy and interest rates at its peak, fiscal consolidation is the only alternative available to the government to spur growth, but on the other hand, its success depends on how it is designed and implemented.