Higher govt borrowings do not crowd out private credit

Macroeconomic and Monetary Developments: Second Quarter Review 2009-10

With the government raising over 80 per cent of its planned borrowings in the first half of the financial year on the back of adequate liquidity in the system, the fear of private credit getting crowded out have subsided, according to the Reserve Bank of India (RBI).

Financial conditions have improved significantly in India ahead of a stronger recovery in growth. This was evident from return of capital flows, significant recovery in stock markets and better transmission from low policy rates, which led to lowering of lending rates, it said.

While resources raised from the market were being used to fight the economic slowdown, it would make a dent into the economy’s financial health, it said. According to RBI, the combined fiscal deficit (CFD) of the Centre and the states might touch 10.2 per cent of the gross domestic product in 2009-10 due to a sharp rise in expenditure to contain the economic slowdown and decline in the pace of tax collections due to cuts in tax rates and moderation in growth.

An overview of the combined finances for 2009-10 indicated that the key deficit indicators would remain high as in 2008-09, RBI said.

The rise in the CFD reflected the continuation of expansionary fiscal stance adopted by governments to fight economic slowdown, it said. The growth in total expenditure would moderate somewhat compared to 2008-09 but non-developmental expenditure might rise substantially, it said.

The combined revenue receipts as a per cent of GDP might decline in 2009-10 over 2008-09, even though the non-tax receipts would rise to 4.2 per cent from 3.8 per cent, it said. RBI said the combined revenue deficit would increase by 1.1 per cent to 5.5 per cent in 2009-10. The combined fiscal deficit would increase by 1.3 per cent to 10.2 per cent.

For the April-August 2009 period, gross deficit of the central government was substantially higher in absolute terms over the same period in 2008-09. But the amount is lower as a proportion of budgeted estimates.

Reflecting the impact of the economic slowdown, the growth in collections under direct taxes such as corporation and income tax decelerated to single-digit in April-August 2009 as compared with a significantly high growth during April-August 2008.

While revenue from Customs declined over the same period due to the sharp fall in imports, revenue from excise duties declined due to tax cuts and fall in domestic sales.

On state government finances, RBI said the fiscal correction and consolidation witnessed till 2007-08 reversed somewhat during 2008-09 on account of the economic slowdown.

The consolidated revenue account of state governments is budgeted to turn into a deficit of 0.6 per cent of GDP during 2009-10, after being in surplus in the previous three years. This is due to the sluggishness in the states’ own tax collections and lower devolution from the Centre along with higher expenditure due ti the recommendations of the Sixth Pay Commission.

As a result, GFD is budgeted to be higher at 3.4 per cent of GDP as compared with 2.7 per cent in revised estimates for 2008-09.