Pitching for hard fiscal reforms, the pre-budget Economic Survey on Wednesday warned that 8.0 per cent annual growth during Tenth Plan was not attainable without reduction in fiscal deficit of both Centre and States now at about 10 per cent of GDP.
While lauding the Centre for enacting Fiscal Responsibility and Budget Management Act, it asked the government to enhance the deadline for wiping out revenue deficit before 2008 taking advantage of robust growth in economy.
"To achieve the targeted annual average growth of 8.0 per cent, Tenth Five-Year Plan envisages an acceleration in investment rate from 24.4 per cent to 32.3 per cent in 2006-07," the Survey, tabled in Parliament by Finance Minister P Chidambaram, said.
Of the 7.9 per cent increase in investment rate, it said 2.6 per cent increase would have to come from public sector.
"Without fiscal consolidation, such step up in public investment cannot be attained," it cautioned.
Fiscal consolidation was critical for economic reforms programme as it can enable government to spend more on infrastructure and social sectors, the Survey said.
In this context, it said the enactment of FRBM Act provides an institutional framework and binds the government to adopt prudent fiscal policies.
"As the economy is doing well now, the adjustments required to eliminate revenue deficit by March 2008 as stipulated in the Act need to be front-loaded," it said.
Since the combined fiscal deficit of the Centre and states was about 10 per cent of GDP, the Survey also cautioned that fiscal consolidation will be incomplete without the involvement of states.
"The limitation of FRBM Act is that it applies only to central government. Fiscal consolidation remains incomplete without the involvement of states," the Survey said.
The burden of fiscal adjustment has to be borne out both by Centre and states. "Though a few states have enacted fiscal responsibility legislations, the majority of states are yet to follow suit," it said.
The Survey strongly recommended that there was a greater need to involve states to effect overall fiscal consolidation and strengthen the growth momentum with macro-economic stability.
Fiscal deterioration were mainly on account of higher level of expenditure on salaries, unfunded pensions, mounting interest payments, improperly targeted subsidies and decline in Tax-GDP ratio, it noted.
"The deterioration of the fiscal situation has not shown up in a crisis so far... But the continuation of the present fiscal situation is likely to adversely affect the macro-economic situation," the Survey said.
"If private investment picks up, any undue pre-emption of resources by government to fund its deficits may lead to a firming up of interest rates and inflation," it said.
