Consolidated fiscal deficit may touch 8%

As expenditure rises, economists expect the government to miss the fiscal deficit target.

At the start of financial year 2011-12, Finance Minister Pranab Mukherjee had placed the government’s revenue and expenditure estimates before Parliament. Halfway down the year, it makes sense to revisit these numbers. The total receipts were estimated at Rs 7,89,892 crore (tax and non-tax receipts net to Centre). On the other hand, expenditure was estimated to be Rs 12,57,729 crore. The fiscal deficit was pegged at 4.6 per cent of the gross domestic product (GDP).

Halfway through, the government announced it would borrow more, as its calculation of funding a portion of the deficit from small savings had gone awry with savers shifting to lucrative term bank deposits.

Last financial year, the government collected Rs 1,01,620 crore more than the estimated Rs 6,82,212 crore, thanks to some windfall gains. However, collections are expected to be weak this year. With increased government borrowing at higher rates, the fiscal gap is expected to widen further, putting the government’s aggressive fiscal deficit target at risk.

According to Macquarie Capital, the cumulative central government fiscal deficit reached three per cent of GDP during the first five months of FY12 compared with the budget estimate of 4.6 per cent of GDP for the entire year. Most economists believe the government would close the fiscal year with a deficit of 5-5.5 per cent of the GDP.

Explains Siddhartha Sanyal, chief India economist at Barclays Capital: “At the moment, there seems to be some weakness on the revenue front. But, we feel the slippage will be primarily due to expenditure overshooting. We estimate the fiscal deficit at 5.3 per cent of GDP.”

High interest rates are burning a hole in the government’s pocket too, as the cost of borrowing is higher in the prevailing interest rate scenario. Bond rates have already touched 8.85 per cent. The government estimates on interest payout, which stood at Rs 2,67,986 crore at the start of the year, may also change. Kaushik Das, India Economist at Deutsche Bank, expects fiscal deficit to remain under pressure, which raises the risk of increased government borrowing.

However, the government’s problems do not end here. The Centre’s consolidated fiscal deficit will touch eight per cent after factoring in the fiscal deficit of states (2.5-3 per cent). Macquarie expects India’s consolidated fiscal deficit to touch 8.6 per cent of GDP. While there is some noise on the risk of a potential downgrade by the rating agencies if the fiscal situation worsens, most economists believe it’s not a major concern as the numbers look better than other countries. However, the losses of state electricity boards, estimated at Rs 70,000 crore, are still not reflected in the states’ balance sheets. Once they are, the picture could change.