Fiscal deficit seen to touch 18-year high

Fiscal deficit seen to touch 18-year high


Centre’s fiscal deficit is projected to widen to an 18-year high of 6.8 per cent of GDP in the current fiscal as the government continues to provide stimulus to the economy, necessitating higher market borrowings at around Rs 4 lakh crore.

With states also allowed to borrow from markets even if their fiscal deficit increases to 4 per cent of their GDP against the current limit of 3.5 per cent, the combined fiscal deficit of India will easily touch double-digit mark.

However, Finance Minister Pranab Mukherjee committed to return to fiscal consolidation part at the earliest, even as the 13th Finance Commission is seized of the issue of setting up new targets for fiscal deficit.

Analysts noted that fiscal deficit at 6.8 per cent is within expectation and they will wait for the Finance Commission report likely in October to comment further. Fiscal deficit is projected to widen against 5.5 per cent expected in the Interim Budget for 2009-2010 and 6.2 per cent witnessed in 2008-09 as the Centre’s expenditure expanded to an all-time high of over Rs 10 lakh crore and tax income taking a hit due to stimulus packages.

Result of slowdown
Fiscal deficit was originally estimated at 2.5 per cent of GDP last fiscal but widened to 6.2 per cent after the government cut excise duties by 6 per cent, service tax by 2 per cent and increased planned outlet to spur the slowing-down economy after Lehman Brothers collapsed in the US.

For current fiscal, the government retained the tax cut part while increasing planned expenditure particularly for infrastructure sector by 34 per cent year-on-year and non-plan outflow by 37 per cent due to higher interest burden on account of rising fiscal deficit etc.

Further rising fiscal deficit will necessitate more market borrowings and again increase in interest burden, which will become a cycle.

The government’s gross tax receipts are projected to come down to Rs 6.41 lakh crore this fiscal compared to Rs 6.87 lakh crore in 2008-09.

But its overall expenditure is expected to rise to over Rs 10 lakh crore against over Rs 9 lakh crore last year.

As part of second stimulus package, states were given flexibility to borrow from markets even if their fiscal deficit touches 3.5 per cent of GDP. This has been raised to 4 per cent in this fiscal.

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