“A commitment to return to FRBMA (Fiscal Responsibility and Budget Management Act) mandate at the earliest and quick reversibility of expansionary policies are critical for markets to synchronise their expectations with that of government and work in a coordinated manner towards the restoration of the high growth momentum,” the report said.

However, under the given circumstances, where it is imperative that the government pumps money into the system to create demand and generate employment, there is a clear contrast in the short term and the medium term fiscal policy. “There is a contradiction between the long and short term fiscal policy. In the medium term, it is important to have fiscal balance. However, on the contrary, the situation demands fiscal stimulus in the short term. We need to start thinking of elements that will bring us back to the path of fiscal prudence,” chief economic advisor Arvind Virmani said.

The government’s fiscal stimulus to rejuvenate the economy has already reached 3.5 per cent of the GDP. But there are still no signs to suggest that the government can sit back and relax and let the previous fiscal packages work out on their own. “The economic analysis says that it is necessary to maintain fiscal stimulus as crisis is not over globally for this year,” Virmani said. “Fiscal deficit is a constraint to growth but we need to make choices necessary in the short term.”

The current fiscal programme could go on as long as till 2010-11 and the agenda for fiscal policy beyond that year would be determined only later this year when the Thirteenth Finance Commission presents its report, the Economic Survey said. “It is the tendency of governments to get used to certain things and we need to keep re-iterating fiscal sustainability. As of now, fiscal stimulus is required as the problem of low demand is still indicated in data,” Virmani said.