Fiscal correction should not impact capital, social spending: FM

New Delhi, Aug 23 (UNI) Finance Minister P Chidambaram today enjoined upon the states to carry out fiscal correction in a gradual but steady manner, to ensure that it does not adversely impact on capital expenditure and spending on social services.

"States may not be able to sustain the marked correction in key fiscal indicators in 2005-06, unless the issues of revenue augmentation, rationalization of expenditure reforms and containment of debt within the sustainable limit over the medium term are addressed", Mr Chidambaram told the Parliamentary Consultative Committee of Finance Ministry.

"Any fiscal correction path under the fiscal responsibility legislation has to be realistic. The process of correction should not adversely impact capital expenditure and spending on social services. The strategy for revenue maximisation needs to provide for necessary flexibility to shift the pattern of expenditure and redirect it to productive assets," Mr Chidambaram said.

The Finance Minister said State Finances were significantly improving with adoption of fiscal consolidation and Fiscal reforms and the states were now more committed to fiscal prudence and raising revenues.

Mr Chidambaram said every generation must learn to live within its own means and not to pass its financial burdens to next generations.

Mr Chidambaram said that state finances started deteriorating significantly over the years as large Revenue Deficits (RD) led to large Fiscal Deficits (FD) and spiraling debt burdens, resulting in emergence of vicious cycle of deficit, debt and concomitant high debt service payments for most of states. The deterioration is mainly attributed to deteriorating balance on Current Revenue (BCR), Poor return on investment, Unrealistic plan projection financed mainly by borrowing and declining capital outlays.

The Finance Minister said several steps were attempted from time to time to improve the state finances and fiscal consolidation has been an important agenda for the states during the last six to seven years. Many states adopted medium term fiscal reform programmes aimed at reducing deficit to a sustainable level and more particularly to improve productivity of expenditure. All States have realised that fiscal prudence was the need of the hour and except one, all states have decided to follow Fiscal Responsibility Budget Management Act, he said.

Mr Chidambaram said to reduce the interest burden of the States, the Union Government formulated a Debt Swap Scheme that was in operation from 2002-03 to 2004-05. The scheme covered outstanding high cost loans with interest rate of 13 per cent and above. An amount of Rs 1,02,033.59 crore of central loans was swapped upto March, 2005.

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