Finance minister P Chidambaram on Thursday 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 fiscal discipline.
"The fiscal deficit for the current year has been contained at 5.2 % and the fiscal deficit for the year 2013-14 is estimated at 4.8 %," Chidambaram said in his budget speech.
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. The five year plan involves gradually narrowing it down to 3% by 2016-17.
The plan draws from the recommendations that a committee headed by former finance secretary Vijay Kelkar had laid out in a recent report.
"When we accepted the main recommendations of the Kelkar report, I had drawn some red lines and promised that I would not cross those lines. I am glad to report that I have kept my promise," Chidambaram said.
The revenue deficit for the current year will be 3.9%and the revenue deficit for the year 2013-14 is estimated at 3.3%. Gross tax revenues are budgeted to grow 19.1% in 2013-14 from 16.7% in the previous year.
"The purpose of a Budget — and the job of a finance minister — is to create the economic space and find the resources to achieve the socio economic objectives. At present, the economic space is constrained because of a high fiscal deficit, reliance on foreign inflows to finance the current account deficit, lower savings and lower investment, a tight monetary policy and strong external headwinds," he said.
Expenditure growth is budgeted to rise 16.4% during 2013-14 from 9.7% in 2012-13, with a steep rise in plan expenditure.
Government expenditure will rise to 14.7% of GDP from 14.3% in FY13. Food subsidies have shot up to Rs. 9,000 crore due to the Food Security Bill — a prelude to elections, which the government expects to be financed by keeping the oil and fertiliser subsidy burden under check.
Overall, the government has budgeted a fall in the subsidy burden from 2.6% of GDP in 2012-13 to 2% of GDP in 2013-14.
It expects gross market borrowing of Rs. 6.3 lakh crore from Rs. 5.6 lakh crore in 2012-13.
Major subsidies are extremely critical from the viewpoint of the fiscal consolidation and are important to meet targets.