'India's fiscal deficit remains at unacceptably high levels'

“The fiscal deficit remains at an unacceptable high level,” Manmohan Singh told heads of 15 Congress-ruled states. “As revenues are rising, so is expenditure. We are in danger of sliding back on our commitment to fiscal responsibility.”

A recent Reserve Bank of India (RBI) report showed the combined state and central deficit in Asia’s third-largest economy fell to 8.3 per cent of gross domestic product (GDP) last year from 10 per cent in 2001/02. Rating agencies criticise India’s public debt level, estimated at more than 80 per cent of GDP, citing it as one of the biggest impediments to an upgrade and sustained double-digit growth needed to alleviate poverty in the $700 billion economy.

The combined fiscal deficit is budgeted to drop to 7.7 per cent of GDP this year, but analysts say various social sector spending plans of the Congress-led government could see finances come under pressure.

The federal fiscal deficit in the first five months of the April-March financial year has already reached more than 57 per cent of the year’s 1.5 trillion rupee target, much bigger than 38 per cent a year earlier. This is despite robust revenues, which have been growing at a healthy pace on the back of rapid economic expansion. The economy grew at an annual 8.1 per cent in April-June, its fastest quarterly pace in more than a year.

India’s communist-backed coalition began the year in April on the back foot, saying it had to suspend fiscal reform to boost spending on the poor who had voted it into power in 2004.

It aims to keep the federal deficit at 4.3 per cent of GDP in the year to end March 2006, instead of lowering it to below 4 per cent as it is supposed to under a recent fiscal law.

It recently unveiled a plan to guarantee 100 days of work to every rural family, which is expected to cost several billion dollars a year.

“I would like to see an improvement in our public finances at all levels of government, especially state governments,” Singh said. “We must reduce subsidies for the rich and divert these resources into investment and employment generation.

There is an urgent need for the restructuring of public expenditure.” Singh said a newly introduced value-added tax (VAT) had started to improve finances. The new system, introduced on April 1 to replace a complex web of state sales taxes, has boosted revenues for cash-strapped regional governments by 15 per cent in the April-June quarter compared with a year earlier.

Singh, who kicked off economic reforms in India, said inflation was under control despite pressure from rising fuel prices. India’s wholesale price index rose 3.97 per cent in the 12 months to September 24, accelerating from a week-earlier annual rise of 3.75 per cent, due to higher fuel and food prices.

India imports 70pc of its oil. World crude oil prices have risen more than 40 per cent since early January, but the government has raised fuel prices by only 14pc.