Finance minister Pranab Mukherjee is expected to trade off a higher-than-5.5% of GDP fiscal deficit for 2010-11 with improved numbers for the outgoing fiscal. This will allow the minister to claim a better rating from international markets that will help Indian companies raise debt at a lower cost. It will also give Mukherjee the space to continue with the fiscal stimulus measures, as demanded by various sectors of the economy.
This means for fiscal 2009-10, the minister expects to show that he has been able to keep the fiscal deficit at 6.65%, which is an improvement over the 6.8% Budget estimate presented to Parliament. Since rating agencies have pushed up India?s sovereign rating to investment grade, they would be concerned if the fiscal deficit for the current fiscal had slipped to 7% of GDP or beyond.
The fiscal deficit for 2010-11 is expected to worsen because of two factors. The first is the impact of the 13th Finance Commission payout. The commission has recommended that states should get a 31.5% share of total tax revenue, one percentage point more than the current share. This will clip by at least Rs 17,000 crore the tax revenue available to the finance minister to shore up his Budget.
The other impact will be from retaining the stimulus measures. The 5.5% fiscal deficit was premised on direct and indirect tax rates being restored to their pre-stimulus levels. Announcing the last Budget, Mukherjee had factored in tax revenues slipping by Rs 46,636 crore this year. That situation is unlikely to improve.
Any rollback of these tax rates is unlikely as industrial recovery is still not broad. Speaking on condition of anonymity, a top government source said it would be counterproductive to hike excise duty from the current 8%, as the goods & services tax to be introduced from April 2011 envisages a duty structure of around 6%.
The double impact of lower revenues and higher expenditure means the Budget will allow for a worse-than-5.5% fiscal deficit. One of the key estimates for higher expenditure is expected to be the right to education, on which the government expects to spend up to Rs 1.5 lakh crore in the next five years. Correspondingly, the revenue deficit too is expected to be higher than the Budget estimate.
This will be compensated for by better figures in the current fiscal.
The finance ministry hopes to achieve this despite tax revenues plateauing out thanks to receipts from the auction of 3G spectrum, which is expected to yield at least Rs 35,000 crore, and the receipts from disinvestment. Normally, disinvestment receipts should have been part of capital receipts and would not have helped Mukherjee. But because of the unusual pressure of the global meltdown, the government has approved a one-year waiver. This means the money will be a part of revenue receipts, which Mukherjee can use to balance the Budget.
The government, therefore, expects that despite expenditure in 2009-10 ballooning to around Rs 11 lakh crore?a rise of almost Rs 80,000 crore from the Budget estimate for the year?the fiscal deficit will be lower. Mukherjee also has legroom, as nominal GDP (real GDP plus inflation) could still be somewhat higher than the 13% estimated in the Budget presented to Parliament last July. A higher GDP means the same expenditure, as its percentage will appear lower. The minister will take a final call on the numbers by the end of this month.