New Delhi: India’s fiscal deficit during April to December jumped to $44.5 billion as the cash-strapped government stepped up spending to stimulate a slowing economy.
Analysts and bond dealers say higher spending and a revenue shortfall as economic activity stumbles will strain government finances, push up borrowing and keep the pressure on bond yields despite a series of rate cuts by the central bank.
India has pledged to spend an extra Rs1.47 trillion during this financial year to stimulate an economy hit by the global slowdown, pay off farmers’ debt, increase subsidies and raise wages of government staff, widening the fiscal gap.
Government data showed on Friday the federal fiscal deficit increased to Rs2.18 trillion in the first nine months of 2008-09 fiscal year or 163.8% of the full-year target.
The deficit was at Rs1.77 trillion until November.
“Fiscal stress is clearly evident. Revenues are going to fall short of annual target. Borrowings will also go up. Our prediction of fiscal deficit is 6.2% of GDP,” said DK Joshi, principal economist with rating agency CRISIL.
The yield on the benchmark 10-year bond rose briefly to 6.21% from 6.18% after the deficit data and ahead of the results of a 100-billion-rupee debt auction.
In February, the government set a fiscal deficit target of Rs1.33 trillion, or 2.5% of gross domestic product (GDP), for the 2008-09 fiscal year, lower than 2.8% in the previous year.
But the finance ministry and central bank are now forecasting a wider fiscal gap by end-March.
“Interest rate cycle is on the downside but the government borrowing is heavy to feed the additional spending to prevent a further slowdown. Hence, the scope for yields to go down is bleak,” said Baljinder Singh, a trader at state-run Andhra Bank.
On Tuesday, RBI governor Duvvuri Subbarao said economic growth could moderate to 7% in 2008-09, from 9% of last year, and warned of a higher fiscal gap of at least 5.9% of GDP due to extra spending and slowing tax receipts.
Subbarao also said there might be a “need to adjust” the government’s market borrowing plans if there were changes in resource inflows, including those from a planned auction of third-generation (3G) telecoms spectrum, or expenditure.
The telecoms ministry has set a target of Rs300-400 billion from the now delayed 3G auction. But the finance ministry has suggested a doubling in the sale base price and the issue has now been handed to a panel of ministers.
“If 3G happens by March, it will relieve some pressure of the government,” said CRISIL’s Joshi.
Until December, the government’s total expenditure stood at Rs5.97 trillion or 79.5% of the full-year target.
Total receipts in the first nine months were at Rs3.79 trillion, or 61.4% of annual budget target, with tax receipts at Rs3.1 trillion.