India's Fiscal Deficit: Controversies over Concern

BANGALORE: It has been over a month, since Modi government is in function. However, the challenges that they have to confront, perhaps, are never ending. This time the dare constitutes the India’s high fiscal deficit.

An Indian American economist Arvind Panagariya suggested, “The fiscal deficit at 4.5 per cent of gross domestic product (GDP) in the fiscal year 2014-15 was within tolerance limits if accompanied by an increase in capital expenditure from 1.76 percent of GDP in the interim Budget to two per cent.”

On the contrary, former FM Chidambaram conflicts Panagariya’s statement "Will the government follow the Kelkar-recommended path and affirm the Budget estimate fiscal deficit of 4.1 percent for 2014-15 (as provided in his interim Budget)? Or will the government take the advice of Arvind Panagariya and allow the fiscal deficit to rise?"

Reduction of fiscal deficit is one of the most desirable concerns of every financial budget; to reduce the fiscal deficit government receipts and expenditure must match.

A renowned author/writer R Jagannathan writes, “Chidambaram himself is responsible for the original sin of deviating from the Kelkar-recommended path. Indeed, he did much worse, straying from it year after year, never reaching the goal.”

India’s Fiscal Deficit during 2013-2014 were reported to be 5.08 Trillion Rupees that accounts to be 4.5 per cent of Indian Economy which is slightly lower than 4.6 percent estimated in the federal budget in February and lesser than 4.9 per cent than the previous year.

"We believe there is limited scope for the government to undertake drastic measures to reduce expenditure to GDP. In this context, we believe the only credible way to reduce spending is by cutting subsidies (mainly oil subsidy). We expect that the government’s approach will be to maintain a moderate pace of expenditure growth at around 9.5 percent year-on-year (Y-o-Y) even as growth picks up to ensure sustainable fiscal consolidation," says Morgan Stanley in a research note.

India is a country where tax rates are very high; the current government has to take serious action. May be non-tax sources is an alternative!