By Kartik Goyal,Bloomberg
NEW DELHI: India’s finance minister P Chidambaram will probably succeed in beating the government’s budget deficit target this financial year because record economic growth led to higher tax collections.
The deficit as a proportion of gross domestic product works out to 3.6 %, the government said in the Economic Survey for the year ending 31 March 2007. The target was 3.8%. Chidambaram will present the budget for the year starting 1 April in New Delhi tomorrow.
The fastest growth in India’s $854 billion economy has boosted company profits, leading to higher wages and demand for manufactured goods and services. The government forecasts India’s economy will expand 9.2 % this financial year, second to China among the world’s major economies.
“The sustained improvement in the fiscal situation of the centre and the states has been attained mostly through enhanced revenues,” India’s finance ministry said in the survey, which was presented to the parliament by Chidambaram today.
India’s gross tax revenue in the nine months ended 31 December 2006, reached Rs3.06 trillion ($69 billion), the government said. India’s revenue growth in the nine months was 32.8 % as against the estimate of 19.5%.
“The overall growth in gross tax revenue suggests that the current financial year may end up with collection higher than initially estimated,” according to the survey.
The government had collected 69.3 % of the budgeted tax revenue as of end-December.
The fiscal deficit of provincial governments is likely to reach 2.6 % of their gross domestic product, compared with a target of 3.2 % a year earlier, according to the survey.
India’s industrial production, a quarter of the economy, grew 11.1 % in December, according to latest data. Improving government finances prompted Standard & Poor’s last month to raise India’s debt rating to investment grade for the first time in 14 years. Moody’s Investors Service raised its rating to investment grade in January 2004.
“Robust economic growth and improved performance of the manufacturing sector helped to maintain the revenue receipts,” according to the survey.
The deficit is the amount the government needs to borrow to bridge the difference between spending and non-debt receipts. A wider budget deficit may lead to higher government borrowing, prevent a decline in interest rates, increase borrowing costs and hurt economic expansion.
India wants low interest rates to accelerate growth to as much as 10 % annually over the next decade from the 8.1% averaged in the past three years.
The government is committed to reducing the budget deficit each year by the equivalent of 0.3 % of GDP, as required by law, and to eliminate its revenue deficit by 2009, borrowing only to fund investments thereafter.
Prospects of higher tax revenue may allow the government to delay increasing bond sales next year as higher revenue will cover expenses such as on roads and defense. Chidambaram may announce bond sales of Rs1.52 trillion ($34.4 billion) in the year starting 1 April, the same level as last year, according to the median estimate of seven traders surveyed by Bloomberg News on 23 February.
The success in managing expenditure has been limited and “considerable downside risks remain from potential pressures on the expenditure front,” the survey said.
India’s budget deficit in the nine months ended 31 December reached 63.8% of the government’s target for the fiscal year ending 31 March, the Controller General of Accounts said on 31 Jan. The deficit was Rs948.54 billion compared with the full-year target of Rs1.48 trillion.