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On a good wicket

Probably the most important beneficial consequence of the revenue buoyancy has been in the area of fiscal consolidation as enunciated by the Fiscal Responsibility and the Budgetary Management (FRBM) Act. The Act, passed in 2003, seeks to rein in fiscal and revenue deficits. The Government is obliged to reduce the fiscal deficit by 0.3 percentage point and the revenue deficit by 0.5 percentage point a year so that, by the target date of 2008-09, the fiscal deficit is brought down to 3 per cent of the GDP and the revenue deficit totally eliminated. Very few have questioned the rationale of the FRBM legislation, but it was always felt that even the seemingly modest goals in deficit reduction would be challenging. The law counted on strong political will, coupled with enhanced revenue mobilisation through reasonable rates, better compliance, and wider tax base, and pruning of public expenditure. More recently, there have been debates in India and elsewhere over the wisdom of mechanically adhering to pre-set targets for fiscal correction, without any regard to critical issues such as the quality of public expenditure and the efficiency with which a wide range of social and economic objectives is sought to be achieved. However, it is well recognised that runaway fiscal and revenue deficits will impose a heavy burden on the economy in a number of ways and over generations.

Fortunately, this year, the Finance Minister could conveniently sidestep those potentially divisive issues. Through a fortuitous combination of tax buoyancy and business confidence, the Government is back on the fiscal consolidation track. Last year, while presenting the budget for 2005-06, he chose to "pause" on the path of fiscal correction, citing the additional financial burden the Twelfth Finance Commission's recommendations had cast on the Exchequer. In the event, the original targets for both the revenue and fiscal deficit reduction for last year (2005-06) have been met. As against the targeted revenue deficit of 2.7 per cent and fiscal deficit of 4.3 per cent, the actual figures, according to the revised estimates, are 2.6 per cent and 4.1 per cent respectively. Given the present favourable climate, the budget's projections for the next financial year — revenue deficit of 2.1 per cent and fiscal deficit of 3.8 per cent — look achievable. It is realised that strong economic fundamentals, with the GDP growth averaging 8 per cent over the past three years, and the vastly improved tax administration have contributed to the relatively healthy state of public finance today. During the last four years, tax revenues have been rising at 20 per cent on an average and the expectation is that the rate will be sustained next year too. Central tax revenues as a percentage of GDP have climbed from 8.2 per cent in 2001-02 to 10.5 per cent last year and they are expected to rise by more than 11 per cent next year. Fiscal consolidation targets seem eminently achievable on present trends.

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