New Delhi: Weeks before he presents his maiden Budget as the finance minister of the United Progressive Alliance-2 (UPA-2), P Chidambaram today highlighted the government's concerns over burgeoning fiscal deficit, saying the government cannot borrow beyond a limit to finance the deficit. He said lack of fiscal space is constraining India's growth.
"The only way we can create that fiscal space is to bring the revenue deficit to zero and limit the fiscal deficit to three per cent of Gross Domestic Product (GDP), so that the whole of that amount - which, I may remind you, is borrowed – is available for capital expenditure," Chidambaram said while delivering the annual K. Subrahmanyam Memorial Lecture at the Institute for Defence Studies & Analysis (Idsa) here today.
On the tightrope that Chidambaram has to walk, he said, the government was not in a position to borrow beyond a limit and that there was a need to bring down the fiscal deficit.
"It is only when we reach a stage in our growth story when there will be a revenue surplus that we can afford to invest more in the form of capital. That day is still some distance away, but not unattainable, if we adopt the path of prudence and sound fiscal management," the finance minister said.
The government has already borrowed more than 90 per cent of its Rs 5.7 lakh crore targeted market borrowing (gross) for the current financial year.
Chidambaram has already come out with a five-year road map for fiscal deficit. According to the road map, the Centre's fiscal deficit is pegged at 5.3 per cent of GDP for the current financial year and a cut of 0.5-0.6 percentage points a year thereafter to reduce it to 4.8 per cent in 2013-14 and ultimately lower it to three per cent by 2016-17, the concluding year of the 12th Five-Year Plan.
Delivering a lecture on national security, Chidambaram said a cut on expenditure on defence or on the police forces will severely compromise the country's defence and security preparedness. "It would diminish our capacity to meet the challenges to national security," he said. However, he evaded a direct reply to a question on speculations over a Rs 10,000-crore cut in defence expenditure.
"So the Rs 10,000 crore which is reportedly being cut, you will know what is being cut only when the Budget is presented. If it is cut for this year it is cut, you cannot do anything about it. That money you cannot have. Can it be provided next year? We can, provided we can grow at a higher rate and we have more money," he said to a query from the floor.
He pointed out that none of the threats to national security can be addressed unless technology is used effectively.
Chidambaram said India has a choice of either becoming the world's third-largest economy and a middle-income country or becoming one of the largest economies of the world that muddles along with the bulk of its people trapped in a life of low income, poor quality, high morbidity and great inequality.
"The first model will make India a secure nation, capable of defending itself, and a force of peace in the neighbourhood and elsewhere. The second model will leave the country exposed to every kind of threat to which will be added internal conflicts as well," the finance minister warned.
Chidambaram said the total government expenditure on health and education in India is below 4 percent of GDP, while other emerging economies spend far more.
He said in India, the central government spends only 0.67 percent of GDP on education in 2010-11, while all the state gvernments put together spend another 2.36 percent of GDP on education. The expenditure of the Central Government on 'health care' is 0.31 percent of GDP and state governments spend another 0.60 percent of GDP.
Comparing India's growth story with China, the finance minister said as a result of its sustained high growth, China was able to lift a large part of its population out of poverty.
"In India, poverty is estimated at 29.8 per cent (of its population), while in China, it is just 13.1 per cent," the finance minister said.