Finance minister P Chidambaram on Monday unveiled plans to reduce India's fiscal deficit to 3% of GDP in five years, demonstrating the government's intent to walk the talk on budgetary discipline amid hopes that his roadmap will serve as a cue for the Reserve Bank of India (RBI) to cut policy interest rates.
"Well, I am making the statement so that everybody in India acknowledges the steps that we are taking... and also (that) the government is determined to bring about fiscal consolidation. And I sincerely hope that everybody will read the statement and take note of that," Chidambaram said, when asked whether the RBI would cut rates in monetary policy review on Tuesday.
Chidambaram's plan draws from the recommendations that a committee headed by former finance secretary Vijay Kelkar had laid out in a recent report. It called for a heavy cut in subsidies and controls on government expenditure.
The five-year plan involves reining in the fiscal deficit to 5.3% of GDP in this fiscal year, 4.8% the next year and gradually narrowing it down to 3% by 2016-17.
"As fiscal consolidation takes place and investors' confidence increases, it is expected that the economy will return to the path of high investment, higher growth and lower inflation," Chidambaram said.
The minister, who has shepherded the UPA government's big-ticket reforms initiatives announced last month to reverse an economic slowdown, said the fiscal consolidation plan will not erode the resource pool to fund flagship poverty reduction programmes.
High subsidies have widened the government's fiscal deficit-shorthand for the amount of money that it borrows to fund its expenses-limiting its elbow room to spend on investing in infrastructure and development schemes to spin jobs and multiply income.
Chidambaram said efforts will be made to avoid "parking or idling of funds" while ensuring that essential expenditure was not hurt.
Experts said the roadmap was good in intent, but lacked detail.
"As with other reform measures announced so far, implementation remains key. We see today's announcement as a statement of intent," said Sonal Varma, economist at broking and research firm Nomura.