''The government inherited a fiscal deficit of 4.5 per cent in 2003-04. We are on course to bring down the fiscal deficit to 2.5 per cent in 2008-09. Likewise, the government inherited a revenue deficit of 3.6 per cent in 2003-04. While we have been able to reduce the revenue deficit by 0.5 per cent a year.'' he added. The Finance Minister said in order to eliminate the revenue deficit completely, there is a need to do better than a reduction of 0.5 per cent a year.
That, however, has not been possible because much of our expenditure on education, health care, drinking water, sanitation, rural roads etc is classified as revenue expenditure, he added. ''Nonetheless, our achievement is considered very satisfactory.
On a lighter vein, I may add, that critics of the Fiscal Responsibility and Budget Management (FRBM) Act have expressed satisfaction that we have allowed ourselves a revenue deficit of one per cent and have not compressed unduly the revenue expenditure,'' the Finance Minister said.
This means that we have adhered to the path of correction, we are not able to eliminate the revenue deficit and it will be one per cent by the end of 2008-09, he added.
The Indian experience over the last three decades has been one of sustained growth, with each decade being an improvement over the previous one. Between 1971-72 and 1980-81, the average GDP growth was 3.2 per cent a year. In the subsequent two decades, the growth rate was 5.4 per cent and 5.6 per cent annually, respectively. Since 2001-02, we have witnessed an average growth rate of 7.6 per cent annually until 2007-08. This experience is unique in many ways since it has been based on the principles of democracy and rule of law.
''This has allowed the government to carry the people along at every stage and, in spite of numerous challenges, the government did not deviat from the reform agenda. The agenda is one of sustained growth in a market economy that takes care of its poor and disadvantaged. While markets ensure efficiency, a democratic governing system ensures that the reform process has a human face,'' Mr Chidambaram said.
He said the constant challenge is to maintain macro economic stability particular, prices.
''The two factors that cause misery to the poor are inflation and loss of jobs. These two factors are highly correlated to the structural adjustment process. When inflation rises or when there are large-scale job losses, the people begin to question the justification and advantages of reforms,'' the Finance Minister said.
In a democratic system, governments are under pressure to slow down and some times reverse the reform process. The country has been able to ward off such pressures by taking a number of steps to lessen the negative impact of reforms, as we have not hesitated to use fiscal, monetary and public policy instruments to contain inflation and to ensure that the growth process creates jobs, he added.
Stating the government has taken a bold step by notifying the Fiscal Responsibility and Budget Management (FRBM) Act, to sustain economic growth amidst growing uncertainty, the Finance Minister said ''it was a wise and courageous decision.'' ''The FRBM Act requires the government to reduce the fiscal deficit every year by 0.3 per cent of GDP and, eventually, to bring it to a level below three per cent by 2008-09. It also requires to reduce the revenue deficit every year by 0.5 per cent of GDP and, eventually, to eliminate it by 2008-09,'' Mr Chidambaram said.
The Finance Minister further pointed out the government has taken a number of steps in the fiscal policy.
''In January 2004, the peak rate of customs duty was 25 per cent.
Today, it is 10 per cent. In fact, the collection rate that is the effective applied rate for all goods is only 10 per cent. Excise duty, which is a duty on value addition in manufacture, has also been moderated to 14 per cent. In the cases of goods of mass consumption, the rates are even lower, many goods are at zero per cent and many others are at eight per cent. The service tax, which is a tax on value addition in services, is also kept at 12 per cent, well below international benchmarks,'' he added.
The Finance Minister said the Monetary Policy has also played its part in maintaining price stability. Since June 2003, the Cash Reserve Ratio has been increased on ten occasions, by 0.25 per cent each on the first eight occasions and by 0.5 per cent on the last two occasions. Likewise, the Repo Rate (the rate at which the Reserve Bank of India (RBI) will lend to the banks) has been increased since April 2005 on seven occasions by 0.25 per cent on each occasion.
Besides, as part of its policy of proactive liquidity management, the RBI has issued Market Stabilization Securities (MSS), Mr Chidambaram added.
The Finance Minister said the battle against inflation and the struggle to maintain a balance between growth and inflation is continuous ''as growth rates have moved upward, higher demand has put pressure on prices. Yet, we were able to contain wholesale price inflation at an average level of 4.1 per cent between 2001-02 and 2003-04 and, even as the growth rate of the economy accelerated in the last five years, we have been able to contain wholesale price inflation at 5.4 per cent between 2003-04 and 2006-07.
The Finance Minister said along with price stability, our primary concern has been employment. The employment growth during 1999-2000 to 2004-05 accelerated significantly as compared with the growth witnessed during 1993-94 to 1999-2000.
''It is estimated that, in the later period, 47 million work opportunities were created compared to only 24 million in the earlier period. In terms of growth rate, it accelerated from 1.25 per cent per year to 2.62 per cent per year,'' Mr Chidambaram said.
The share of employment in the manufacturing sector increased marginally. Trade, hotel, transport, communications, finance, insurance and real estate were the sectors that contributed significantly to higher employment growth.
The Finance Minister said that the developing economies has been put under enormous burden as a result of a relentless rise in commodity and food prices as well as rise in global fuel prices.
''Turbulence in the financial markets has also added to the difficulties of sustaining high growth. There are clear signs of a slowdown in the world economy. There are also signs of rising inflation in many countries of the world, which has obvious negative effects on future growth,'' Mr Chidambaram said.
Anticipating these consequences, we have taken steps to stimulate domestic demand in the Indian economy, including significant reductions in the personal income tax, expanding and deepening the corporate debt market, and large outlays of public expenditure on education, health, roads, irrigation etc in the recent Budget, should encourage both domestic and foreign investors to continue to have faith in the India growth story, he added.
The Finance Minister also pointed out that huge investments is required in the Infrastructure sector, estimated over 500 billion dollars over a period of five years. ''The bulk of this investment ought to and will come from domestic sources, including Government. We cannot garner these resources unless there is high growth and unless Government and the private sector are able to realise and retain large sums of money that can be ploughed back as investment. In short, India has no option but to aim to grow at a high rate over the next 10-20 years,'' Mr Chidambaram said.