Fiscal deficit for 2011-12 may be close to 6% of GDP

Written by Sunny Verma | Bijay Shankar Patel | New Delhi | Updated: Jan 14 2012, 08:09am hrs
The fiscal deficit for the current financial year could be close to 6% of the gross domestic product (GDP), much higher than figures quoted earlier, giving credence to Planning Commission deputy chairman Montek Singh Ahluwalia's view that deficit would be significantly worse than the budgeted 4.6%.

With the fiscal correction plan going awry, a Bill to amend the Fiscal Responsibility and Budget Management (FRBM) Act will also be tabled in the Budget session of Parliament. This will set out a fresh plan for fiscal consolidation. Officials said a countercyclical fiscal strategy will be built into the new FRBM rules, giving the government the leeway to step up spending during an economic downturn, and to reduce the deficit by more than the target amount in boom years.

The government had, starting from the 2009-10 Budget, stepped up spending to counter the slowdown caused by the global economic crisis. This fiscal stimulus has since been withdrawn in a calibrated manner, although some of it still in place. The current slowdown in the economy due to the stagnation (even decline) in private investments and sluggish private consumption and the continued uncertainty over the European sovereign debt crisis have affected revenues while expenditure on subsidies and sundry welfare schemes are proving to be difficult to control.

In its report, the 13th Finance Commission had set the country's s fiscal deficit targets at 5.7% in 2010-11, 4.8% in 2011-12, 4.2% in 2012-13 and 3% in the next two fiscal years. The government is unlikely to adhere to these as a result of the deviations and a fresh road map will now be drawn.

Officials working on the budget numbers said the top-end estimate of the fiscal deficit by March-end 2012 has been pegged at 5.8%, even as the actual number would become clearer only closer to date of the budget.

The finance ministry, in consultation with the Comptroller and Auditor General of India, is finalising the draft bill to amend the FRBM Act, 2003, which laid down a five-year plan of paring the fiscal deficit to 3% of GDP in its terminal year, 2008-09.

"Unless a concerted attempt is made to control the deficit, there is real risk of slipping from the path of fiscal consolidation," an official said.

Without divulging any number likely deficit number, the finance ministry's chief economic adviser Kaushik Basu said this year should be treated as a fiscal aberration but there was a need to quickly go back to fiscal consolidation.We will miss the target. This is not something we feel very good about; but if there is one year where missing the target will not be such a dramatic tragedy, it will be this year, Basu told FE in an interview last week.

The government is likely to miss its direct tax target of Rs 5.32 lakh crore estimated for the current fiscal. The income tax department is struggling collect even Rs 5 lakh crore, resulting in a shortfall of over Rs 30,000 crore from the target. The indirect tax collections estimate of Rs 4 lakh crore is expected to be missed by Rs 2,000-3,000 crore.

On the expenditure front, the finance ministry expects a slippage of over Rs 90,000 crore from its Budget estimate of Rs 12.58 lakh crore. This is because of the higher oil subsidy of Rs 47,000 crore and another Rs 46,000 crore for fertilisers. Food subsidy will more or less remain at par.

In April-September 2011, the fiscal deficit accounted for as much as 68% of the budget estimate, much higher than the 45% permitted under Rule 7 of the FRBM Rules, 2004. Citi Investment Research & Analysis said last month that India's fiscal deficit could be between 5.1% and 5.8% due to lower tax collections, slippage in its public sector divestment programme and the high under-recoveries of oil companies.