Projecting India to move towards lower interest rate regime, the Economic Survey on Thursday said buoyancy in tax collection would reduce fiscal deficit to 3 per cent in 2008-09, but advised the government to keep a vigil on developments in the US and global commodity prices.

"A lower fiscal deficit will result in a reduction in the real domestic long-term interest rate of economy and thus bring it closer to the world long-term rates," said the Economic Survey for 2007-08, which was tabled by Finance Minister P Chidambaram in Parliament.

It said a lower fiscal deficit would lead to a fall in supply of government securities and subsequently decline in interest rates in the domestic economy. Stating that fiscal surplus can also result in an increase in nation's global wealth holdings in countries like China, Russia and oil exporting countries, the Survey said the Finance Commission may consider lowering FRBM targets over the next 5 years.

It pointed out that average cost of outstanding government borrowings, estimated at Rs 20,99,458 crore for 2007-08, declined to 7.9 per cent as against 8.1 per cent in the previous year. However, in the global economy the average interest rates are hovering around 4 per cent.

Slow down in the US economy has reduced interest rates to 3 per cent in that country. In 2007-08, the Survey projected the fiscal deficit of Centre to come down to 3.2 per cent of the GDP as against 3.4 per cent in the previous year, and estimated decline in revenue deficit to 1.5 per cent as against 1.9 per cent of GDP in 2006-07.

Economic Survey 2007-08: Complete Coverage