Fiscal slippage likely despite reforms: RBI

Concerns on fiscal deficit limited bond gains

While the measures were steps in the right direction, further corrective measures are required to contain the fiscal deficit within sustainable limit, said the Reserve Bank of India (RBI) in its Macroeconomic and Monetary Development report released today.

"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 the measures such as hike in diesel prices, restriction on subsidized LPG and levy of service tax on railway freight and passenger fares.

RBI said that food, fertilizer and petroleum subsidies remain high and are likely to overshoot the government's budget estimates. As per the budget estimates, the government aims at containing the fiscal deficit at 5.1% in the current financial year. Fiscal deficit in 2011-12 was at 5.8% of gross domestic product.

In the five-year roadmap on fiscal consolidation rolled out today, sets the fiscal deficit target at 5.3% for current year and wishes to bring it down to 3% by 2016-17. Finance Minister P Chidambaram said "5.1% was very challenging. After looking at all factors, we think 5.3% is doable."

He said that disinvestment, spectrum auction and cuts in plan and non-plan expenditure cuts would help the government in achieving fiscal consolidation.

The RBI said that the gains in the bond markets were limited due to concerns about the likely fiscal slippage during the year. Around 72% of the budgeted borrowing program 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 market participants, fiscal slippage may lead to government overshooting the market borrowing target for 2012-13.   "Concerns about fiscal slippage have kept yields largely flat during October 2012," said RBI.

Today, the yields on the ten-year benchmark government bond ended unchanged at 8.13% as traders chose to stay away ahead of the second quarter monetary policy review.