Fiscal slippage likely despite reforms: RBI

Concerns on fiscal deficit capped bond gains in October

Though some steps in the right direction have been taken by the government, further corrective measures are required to contain the fiscal deficit within sustainable limits, said the Reserve Bank of India (RBI) in its Macroeconomic and Monetary Development Report on Monday.

“Fiscal slippage is likely in 2012-13, despite recent measures by the government,” said the central bank, a day ahead of announcing the second quarter monetary policy review.

RBI was referring to measures such as the raising of diesel prices, restriction on subsidised cooking gas sale and levy of service tax on railway freight and passenger fares.

RBI said food, fertiliser and petroleum subsidies remain high and are likely to overshoot the government’s budget estimates. According to these, the fiscal deficit is to be contained at 5.1 per cent of gross domestic product (GDP) in the current financial year. In 2011-12, it was 5.8 per cent of GDP.

The five-year road map on fiscal consolidation, rolled out on Monday, sets the fiscal deficit target at 5.3 per cent for this year and wishes to bring it down to three per cent by 2016-17. Finance Minister P Chidambaram said: “(The) 5.1 per cent (target) was very challenging. After looking at all factors, we think 5.3 per cent is doable.”

He said disinvestment, spectrum auction and cuts in plan and non-plan expenditure would help achieve fiscal consolidation.

RBI said gains in the bond markets were limited due to concerns about the likely fiscal slippage during the year. About 72 per cent of the budgeted borrowing programme of the central government, through dated securities amounting to Rs 4.09 lakh crore, has been completed so far. The government aims to borrow Rs 5.7 lakh crore from the markets this financial year.

According to participants, fiscal slippage might lead to the government overshooting the market borrowing target for 2012-13.

“Concerns about fiscal slippage have kept yields largely flat during October,” said RBI. On Monday, yields on the 10-year benchmark government bond ended unchanged at 8.13 per cent, as traders chose to stay away, ahead of the second quarter monetary policy review.