'A 5.6% deficit may not be a problem for India': IGIDR

A fiscal deficit of more than 5 percent should not give Finance Minister Pranab Mukherjee sleepless nights as long as there is serious intent to reduce that deficit. That’s according to Ashima Goyal, professor at the Indira Gandhi Institute of Developmental Research.

In an exclusive interview to Firstpost, she said the challenge for the government is to rein in the deficit while addressing the issue of slowing economic growth.

Cutting the fiscal deficit will involve lowering government expenditure, which has fuelled consumption and inflation, even as critical agricultural bottlenecks persist. Elaborating on that point, she said the composition of expenditure needs to be changed to allow inflation to fall and kick-start economic growth.

She also believed that the intent to lower the fiscal deficit would be more important to investors and businesses than the actual figure.

Goyal expressed concern about the amount of subsidies being doled out by the government, adding that expenditure on the food subsidy bill is something that will be difficult to cut down even if revenues do not grow.

She hoped that fuel subsidies would be brought down in the Budget, especially those on diesel; however, she thought it could be done only if accompanied by tax reforms, since state taxes on diesel are very high. Of course, higher fuel prices could stoke inflationary pressures. But if they are accompanied by tax cuts and other efficiency improvements, prices might not rise by that much, she noted.

In pursuit of higher revenues, the government could increase taxes from the services sector, she added.

Like most economists, she thought that this would be a crucial Budget for the government. We can only hope the FM delivers.

Watch the whole Firstpost interview here.

See more Budget 2012 videos and expert views on Firstpost: Ajay Shah , Rupa Rege Nitsure , Indranil Pan , Surjit Bhalla .