The Finance Minister has been continuously battling the twin deficits (current account and fiscal deficit) for some time now. The current account deficit (CAD) has narrowed thanks to the to the government's curbs on gold and non-essential imports. But despite this relatively positive prospect, the FM is unlikely to be a relieved man these days. This is because his biggest worry, reining in the fiscal deficit, is far from over and, by most accounts; things are likely to get tougher from here on.
FM has repeatedly been saying that fiscal deficit target of 4.8% is a red-line that will not be breached at any cost. But after the drubbing which the Congress party got in the four state assembly elections, his tone has changed somewhat. The usual phrase of 'red line this year' turned into 'there can be no compromise on the decision to walk on the path of fiscal prudence, and contain fiscal deficit step by step, year by year, until we reach the goal of 3% of GDP in 2016-17'
Does this mean long-term fiscal deficit target of 3% will be achieved in FY17, and that target for FY14 may not be achieved? The numbers certainly point to this. Already the revenue growth is slower than normal - only 35% of the target was met in the first half as against the normal 40%. And the Government has gone on an overdrive on the expenditure front, exhausting 84% of the fiscal deficit target in the first half. Thus, the government will have to drastically cut down on expenditure in the second half to meet the fiscal deficit target.
This seems unlikely, given the election year and the debacle faced by the Congress party in the four state assembly elections. In-fact the Union government will come under considerable pressure to loosen its purse strings and spend more money on the welfare schemes of the UPA in search of votes. This would only lead to the government crossing the red line this year.