Mar 12, 2012, 08.38 AM | Source: CNBC-TV18
Govinda Rao, member, PMEAC and Siddhartha Roy, advisor to the Tata Group, discuss various measures to manage fiscal deficit and reduce subsidies
Here's an edited transcipt of the panel discussion on CNBC-TV18's Budget Special. Also watch the accompanying video.
Q: Ultimately, the fiscal deficit is a function of the nominal GDP. What kind of GDP do you estimate, though in the current year we will still manage a nominal GDP of 16% largely because of high inflation?
Rao: Yes, in fact this year's growth numbers, according to the CSO (Central Statistics Office), is estimated at 6.9%. So in the coming year, I think it will be anything between 6.5% and 7%. If you have another 5% - 6% inflation, the GDP would not be more than something like 13%-14%. I donít see growth accelerating to a very high level In the next year. We should be happy if it can hold it at the same level as this year, which is about 6.9%.
Q: Would not having a very big nominal GDP make reducing the fiscal deficit that much more difficult?
Rao: Of course, it is going to be extremely difficult. In order not to be alarmist, the government will possibly contain the fiscal deficit at 5.5%. Even with that, there will be some portion of expenditure of the government that will be passed onto next year by not paying the subsidy bills, because that is the problem we have with the cash budgeting.
So when you have that, there will be some backlog of this yearís problem, and in addition to that of next year, the expenditure is going to be huge. With the nominal GDP not increasing to 15%-16%, life is going to be much more difficult for the finance minister.
Q: What is a fiscal deficit number you estimate?
Rao: I am of the view that in this Budget session, the government will launch a new program of fiscal adjustment. I donít see any confining of the fiscal deficit to 4.2%. If the government is able to contain it at 4.5%, it will be a great achievement, But it will be anything between 4.5% and 5%.
Q: Roy, would you agree that fiscal deficit is the key number that you would watch for in the Budget or are there other things that you will also watch out for closely?
Roy: The key issue is how to bring back growth in the economy. For that reason, fiscal deficit has to be within certain limit. But that is not the key indicator of success, going ahead.
Q: Rao, what would be your biggest highlight that you would look for in the Budget as an economist? Will it be the fiscal deficit at all or would it be like Roy says, the growth impulses that it can provide?
Rao: It's the fiscal deficit that will give a lot of impulse to growth. It will also be helpful in creating a better economic environment. At this stage, its not only that the large borrowing by the government crowds out private investment, large borrowing by the government adds to the debt burden - credit rating in the international market would be dismal.
As a result of which you will have to, when the credit ratings goes bad obviously the interest rates on the international borrowings will go up. So you have a variety of problems with the fiscal deficit. So my major focus will be on the fiscal deficit and then of course, infrastructure spending.