Rising fiscal deficit not sustainable: FM

Finance Minister Pranab Mukherjee said on Wednesday the country's GDP growth might exceed 6 per cent in the current financial year, but a rising fiscal deficit was not sustainable in the long term.

"The government has stepped up its development outlay to the extent of 39 per cent, and we had to finance not through our own resources but through borrowed resources. But this level of deficit is not sustainable in the long run," he said at the annual general meeting of the Bengal Chamber of Commerce and Industry here today.

The government has set a target of bringing the fiscal deficit down to 5 per cent of the GDP by 2011, and 4 per cent of the GDP by 2012.

Also, there was a possibility of the wholesale price index to further move up, but the government would maintain an equilibrium between supply and demand, even by increasing imports, he said, adding that the government was not in favour of a tight monetary policy.

"If the present trend continues, the second quarter GDP would be better than the first quarter," the minister said.

"The wholesale price index has become positive, and it is expected to be more positive. Thus, we have to see how to manage the deficit, and ensure the prices are moderate. We can do that by providing more subsidy, and a supply-demand management. Wherever there is a shortfall, we will see if there is a need for imports, without major announcements, as India has been a major buyer of food grains and prices might increase," he further said.

India needed to widen its export destination, as about 68 per cent of its exports were in the economies worst affected due to the economic crisis, he said.

Also, not only exports, but the manufacturing sector had not fully recovered so far, and impact of drought has been severe, the minister said.

"On top of the financial crisis, we had a drought. The shortfall in the sowing area of the kharif crop was between 60 and 65 million hectares," Mukherjee said, adding this could translate into an output shortfall of 14-15 million tonnes.

The manufacturing sector was also yet to come out of the slowdown effects, he added.

"The adverse impact of the slowdown is not only in exports, but also in the manufacturing sector. The industrial production fell to 6.6 per cent in July, from a slightly higher 6.8 per cent in June. We expect better figures in the month of August. The first-quarter GDP growth was 6.1 per cent, and we expect a better growth in Q2," he said.

On the management of the fiscal deficit, Mukherjee further said: "We had some special expenditure  in the current year, like due to the recommendations of the Sixth Pay Commission. The planned outlay has also nearly doubled this year, and there has been a shortfall in revenue. The stimulus packages will not be required as the economy recovers. Therefore, there will not be a question of a revenue shortfall, but of a revenue upswing," he said.

The government has provided support to the tune of Rs 2.86 lakh crore (Rs 2.86 trillion) through stimulus packages.

Image: Pranab Mukherjee