Widest deficit since reforms began

As the deficit balloons to 6.8 per cent, govt borrowing may crowd out private investment

Fiscal deficit, the difference between the government’s total expenditure and receipts, is projected at 6.8 per cent of the Gross Domestic Product, or GDP, in the current financial year, the widest in two decades.

The revised estimates for 2008-09 peg the deficit at 6.2 per cent of GDP. February’s Interim Budget put it at 5.5 per cent for this financial year, which would have been Rs 68,000 crore less than what today’s Budget expects.

Finance Minister Pranab Mukherjee acknowledged the need to contain the deficit, but did not provide a roadmap for returning to the target set under the Fiscal Responsibility and Budget Management Act. “On the medium-term fiscal perspective, I await the recommendations of the 13th Finance Commission,” he said.

As per the FRBM target, the Centre should have reduced its fiscal deficit to 3 per cent and eliminated the revenue deficit — the difference between revenue receipts and revenue expenditure — by March 2010.

In absolute terms, the fiscal deficit touched Rs 4,00,996 crore for the first time; the government plans to bridge the gap almost entirely through market borrowings of Rs 3,97,957 crore. The Centre would borrow Rs 35,000 crore more than the borrowing programme released earlier.

High market borrowing is cited as a reason why the yield on the benchmark 10-year government securities has not reacted to the interest rate cuts announced by the Reserve Bank of India. There is fear that the government’s borrowing, which has nearly tripled from the Budget estimate of 2008-09, would crowd out private investments.

The revenue deficit is projected at 4.8 per cent of GDP in 2009-10, as compared to 4.4 per cent in the previous year. The primary deficit, which is the number arrived at after taking interest payments out of the fiscal deficit, is estimated at 3 per cent of GDP (Rs 1,75,485 crore). A negative number is good for the economy as it would signal borrowing to create assets that will yield future benefits. This deficit, after staying negative in 2007-08, became positive last year.

States are given an additional relief of 0.5 percentage point of their GDP to borrow from the market. It would result in additional borrowing of Rs 21,000 crore from the market.