India is likely to hit a fiscal deficit target of 5.3 per cent of GDP this year despite a significant shortfall in revenue, a government report said on Wednesday, a day before the budget, but it conceded economic growth would be a sluggish 5 per cent.
The annual report on challenges facing the economy was prepared by Raghuram Rajan, a former chief economist to the International Monetary Fund (IMF) who became the top adviser in the finance ministry last year.
It came a day before finance minister P Chidambaram unveils what is expected to be the most austere budget in years. Since returning to the finance ministry for his third stint in August, Chidambaram has cut spending sharply in a drive to narrow the fiscal deficit.
Mr Rajan had previously said that 5.3 per cent was a "tough" deficit target for fiscal year 2012-2013, but the spending cuts in areas such as welfare, defence and road projects have convinced economists that the goal may be reachable, even though weak corporate performance and growth has hit tax receipts.
However, the report said more tax income was needed.
"It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure-to-GDP ratio, in view of large unmet development needs," the report said.
A deficit of 5.3 per cent of GDP would remain the widest spending gap among the BRICS group of major emerging nations, which also includes Brazil, Russia, China and South Africa.
It makes credit costly for the private sector and is the main reason for threats by ratings agencies Standard & Poor's and Fitch to cut India's sovereign credit rating to 'junk'.
"There is no escape route in achieving the 5.3 per cent fiscal deficit target and I do not expect any slippage," said Anubhuti Sahay, an economist at Standard Chartered Bank. "Reining in expenditure is likely to remain a theme for FY14. However, this is not the way to manage the overall growth story. You have to manage the supply side in the middle to long term."
The report forecast the economy will grow 5 per cent this fiscal year, falling in line with a separate government forecast that Mr Rajan and Mr Chidambaram questioned earlier this month, saying it was based on old data. Such low growth is the worst in a decade and could make the deficit target harder to reach.
Mr Rajan's report predicted gross domestic product growth of between 6.1 per cent and 6.7 per cent in the financial year that starts in April, roughly in line with private economists' recent forecasts.
On Thursday, India is due to report GDP data for the quarter ending in December.
Prioritising expenditure and further cuts to subsidies on fuel are also key to medium-term fiscal consolidation, the report said. Mr Chidambaram has vowed to bring the deficit down to 4.8 per cent in the fiscal year that begins in April.