Finance Minister P Chidambaram is set to reduce the Centre's revenue deficit as a percentage of the gross domestic product by 0.7 per cent in the current fiscal.

The Centre's revenue deficit was estimated at Rs 89,861 crore (Rs 898.61 billion), or 2.9 per cent of the GDP, in the interim Budget for 2004-05, presented on February 3.

Senior finance ministry sources told Business Standard the deadline for eliminating the revenue deficit had been pushed back by a year to March 31, 2009, in line with the United Progressive Alliance's common minimum programme.

The Fiscal Responsibility and Budget Management Act had stated that the deficit would be reduced to zero in five years beginning 2003-04.

The sources indicated that the Centre might, however, exceed its fiscal deficit target since disinvestment receipts would take a hit this fiscal.

While former Finance Minister Jaswant Singh had estimated Rs 16,000 crore (Rs 160 billion) divestment receipts in his interim Budget, it is likely to be scaled down significantly.

Leading economists too expect that the commitments of the new government, as outlined in the common minimum programme, will result in a higher deficit.

In its June report, the National Council for Applied Economic Research has said the promises of the common minimum programme  will result in an additional burden of over Rs 13,600 crore (Rs 136 billion) this fiscal.

The finance ministry sources said a slightly higher fiscal deficit should not be a cause for concern, if the government managed to rein in its revenue deficit. "This would mean a clear case of additional public investment, driving up the fiscal deficit," a source said.

The Centre's fiscal deficit for 2003-04, as per the revised estimates of Singh's interim Budget, stood at 4.8 per cent of the GDP. The revenue deficit was estimated to be 3.6 per cent of the GDP for the last fiscal.

Chidambaram is banking on improving the previous fiscal's tax mobilisation efforts by over 20 per cent in both direct and indirect taxes in order to slash the revenue deficit by 0.7 per cent in 2004-05.

The initial estimates of industrial production and exports indicate the economy will be able to maintain the 7 to 8 per cent growth momentum, giving him hope that the targets are achievable.

While the UPA government has committed to raise the level of public investment substantially, the sources said it would be possible only by expediting the capital expenditure and investment plans of public sector undertakings and the private sector.

The sources said it would be wrong to presume that the stickiness of the interest rate on small savings instruments would affect the compression in the revenue deficit. They said any effect of a rate cut on the financial outgo of the Centre would be felt only the year after.