High fiscal deficit cannot be sustained for long: FM

India's fiscal deficit can’t be sustained for long, Finance Minister Pranab Mukherjee said. “We shall have to strike a balance between the requirements of the economy and the capacity of the economy to bear this level of fiscal deficit,” Mukherjee told reporters in New Delhi. However, separately, the Finance Minister said that immediate withdrawal of the fiscal stimulus measures may not be the correct approach to tackle the high fiscal deficit, which is set to hit a 16-year peak this fiscal year. India’s fiscal deficit is forecast to increase to 6.8% of gross domestic product (GDP) in the year ending March 2010. A widening budget deficit has made Indian bonds the worst performers this year among the top 10 local-currency debt markets in Asia outside Japan, with a 5% loss.

Mukherjee is borrowing a record Rs4.51 trillion this year to fund a series of stimulus packages announced in the wake of last year's global financial crisis to revive growth in Asia’s third-largest economy. Meanwhile, Chairman of the 13th Finance Commission Dr. Vijay Kelkar said that the panel has recommended a new path to cut the Government’s budget deficit. Kelkar’s report, due to be placed in parliament early next year, has assessed the impact of the proposed goods and services tax (GST) on trade and made recommendations on oil bonds, he said, without providing details.

The Finance Minister said that the recommendations of the 13th Finance Commission, which submitted its report to President Pratibha Patil earlier in the day, will be reflected in the Budget 2010-11. “There is a system. The report will be tabled in Parliament as per the system,” Mukherjee told reporters on the sidelines of a function in New Delhi. After that, the report will be reflected in the Budget, he said.

The report of the 13th Finance Commission, headed by the former Finance Secretary, Dr. Vijay Kelkar, assumes importance since reforms in the direct and indirect taxes areas are likely to be in place in the next couple of years in the form of GST and Direct Taxes Code. The report will be given by the President to the Finance Ministry. The Cabinet will then adopt the report and is expected to table it in the Budget session of Parliament.