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'Policy action needed to contain fiscal deficit'

Policy action is ‘very much’ needed to reduce petroleum subsidies and contain contain fiscal deficit at budgeted level of 5.1 per of gross domestic product (GDP) in this financial year, Prime Minister’s Economic Advisory Council chairman C Rangarajan has said.

‘We should take all the steps that are necessary to ensure that fiscal deficit is at the targeted level of 5.1 per cent. This is going to be very difficult unless we are in a position to contain subsidies.

To contain subsidies, particularly petroleum subsidies, and fiscal deficit at 5.1 per cent, policy action is very much required,’ Rangarajan said.

Delivering a speech at a function in Hyderabad, he said higher levels of fiscal deficit may push interest rates high there will be more government borrowings.

‘The situation is likely to be a shade better during the current fiscal,’ he said, adding that the the country has the potential to grow at 8 to 9 per cent.

Finance minister P Chidambaram had asked noted experts Vijay Kelkar, Indira Rajaraman and Sanjiv Misra to assist ‘the government in formulating the path of fiscal consolidation. It is expected that the work will be completed in a few weeks. The Finance minster had also said that “the burden of fiscal correction must be shared, fairly... by different classes of stakeholders... adjustments must be made both on the revenue side and the expenditure side.’

The government has budgeted 5.1 per cent of fiscal deficit for 2012-13. The fiscal deficit had ballooned to 5.76 per cent of GDP in the last fiscal due to high fuel subsidy outgo. The government has not been able to decontrol diesel prices even after taking in-principle decision. For the April-June period, the fiscal deficit rose to Rs 1.9 lakh crore. The Centre hopes to bring down the deficit to 5.1 per cent of GDP in the current fiscal but the task seems difficult in view of rising oil, food and fertiliser subsidy bills.


‘GOLD IMPORT A REASON FOR HIGH CAD LAST YEAR’

India’s huge gold imports in the last financial year at $60 billion was partially responsible to high current account deficit, C Rangarajan has said.

According to Rangarajan, India saw $60 billion worth of gold imports last year and the situation partly contributed to high CAD levels.

‘Gold imports in the previous year (2010-11) was $ 40 billion. The increase of $20 billion is partly attributable to high level of inflation. If you exclude that $ 20 billion, which I considered to be an excess, then the current account deficit would have come to moderate levels (last year),’ Rangarajan said.

The current account deficit was at 30-year record high of 4.2 per cent of the GDP in 2011-12.

CAD occurs when country’s total imports and transfers are higher than its total exports and transfers. High levels of CAD leads to a slew of problems, including deterioration in the currency, to the economy. In the first quarter policy statement, RBI had said one of the reasons for not reducing interest rates was the high fiscal deficit and CAD. The CAD was at 30-year record high of 4.2 per cent of the GDP in 2011-12. CAD occurs when country’s total imports and transfers are higher than its total exports and transfers.
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