The finance minister has done a great job in announcing a revised fiscal deficit/GDP ratio for 2009-10 at 6.9% (inclusive of oil and fertilizer bonds and considering 2004-05 as base year for GDP) compared with the 7.8% of 2008-09. That, too, in an atmosphere where in the global scenario sovereign debt has taken the centre-stage. Further, the target for fiscal deficit/GDP for 2010-11 is at 5.5% while the ambition for the next couple of years is to reduce it to 4.8% in FY12 and 4.1% in FY13.
The target would also be to reduce domestic public debt to GDP ratio. In the next financial year itself, the debt servicing burden as a percentage of GDP is envisaged to go down to 36.4% from 38% in 2009-10 (35.6% in 2008-09). Improvements in this ratio would mean lesser resources spent out of current receipts to pay-off past debt and thus also imply more resources being available for productive spending.
For the next financial year, on the revenue side the finance minister seems to pin his hopes on a cyclical upswing in the economy along with the partial roll-back on the excise and customs duties. All this is expected to boost the gross tax revenues by 18% in FY11 compared with a rise of 4.6% in 2009-10. The biggest increase in percentage terms are expected from the customs and excise duties and as a proportion to GDP the gross tax revenues are likely to be at 10.8% in FY11, higher than 10.3% in the current fiscal. Further comfort to the revenue chain is sought to be obtained through Rs 40,000 crore of PSU disinvestment and Rs 36,000 crore via auction of 3G spectrum. On the expenditure side, some containment was attained naturally with arrear payments under the Pay Commission and the growth targeted for next year is at 8.5%, down from 15.6% of this fiscal.
But, what can be the concerns. One, the very high receipts targeted via the 3G auctions and the PSU disinvestments is contingent on the risk-appetite in the globe continuing and equity markets in India remaining robust. The cash subsidy Bill for 2010-11 for oil is considered only at Rs 3,108 crore and this is unlikely to be met unless the recommendations of the Kirit Parikh Committee on oil sector deregulation is accepted or the international crude oil prices come down significantly. Further, the global recovery can sour once more and this could create a nasty negative surprise for revenue collections.
Further, despite a 5.5% fiscal deficit/GDP ratio, gross borrowings remain elevated at Rs 4,60,000 crore and could pose a challenge especially as policy interest rates can also be raised soon. Higher interest rates that ensue could in turn sour the economic momentum in India and upset Budget calculations. We can only hope that this is not the case!