Will India’s fiscal deficit be worse than Greece’s this year?

The chart speaks for itself; the International Monetary Fund (IMF) certainly believes that India’s overall fiscal deficit (including the deficit of its states) as a percentage of gross domestic product (GDP) will be much higher than that of Greece, Portugal, Spain or Ireland this year.

The forecast is probably based on the assumption that the austerity programmes currently being imposed on Europe’s southern periphery will work. This year, according to the IMF estimates made in its fiscal monitor update released on Monday, India’s fiscal deficit, at 8.9% of GDP, will be the second highest among the major advanced and emerging markets, behind Japan’s. In 2013, IMF expects Japan’s fiscal balance to improve, while it doesn’t believe there will be much progress in India. The upshot: India will be No. 1 among all major world economies on this benchmark.

Even Ireland, which had a massive fiscal deficit at 31.2% of its GDP in 2009, will have a lower deficit than India this year. It’s also interesting to note that the US had a higher fiscal deficit than Greece in 2011 and IMF expects both the US and the UK to have higher fiscal deficits as a percentage of GDP than most of the southern European nations. Clearly, the common currency is responsible for the predicament in which the European periphery finds itself. Indeed, Italy’s fiscal deficit in 2011 was a low 3.9% of GDP, so the problem is not just a fiscal one.

What are the reasons for IMF’s pessimistic views about India’s ability to trim its deficit? According to the fiscal monitor update: “In India, overall deficits for 2012–13 were revised upward to almost 9% of GDP, more than 0.5 percentage point higher than in the April 2012 fiscal monitor, mainly due to higher fuel subsidies and revenue shortfalls. A determined reduction in costly subsidies would be a strong signal of a credible fiscal turnaround. It would also allow relaxation of financial restrictions, spurring private investment and growth.”

Of course, India’s ability to claim the dubious distinction of being numero uno in the fiscal deficit league will depend very much on whether countries such as Greece and Spain will swallow the bitter fiscal medicine being forced down their throats. That is by no means certain and the IMF update concedes that “the situation in Greece remains fluid”.

The update points out that despite the high deficit, India’s debt-to-GDP ratio, at an estimated 68% of GDP this year, is much lower than Greece’s 162.6%, or Japan’s 234.5%. But one reason for this is India’s high inflation, which bloats its nominal GDP. As Monday’s update of IMF’s Global Financial Stability Report warns, “India is a rising concern, with the rupee recently weakening to new record lows, as the need to finance large fiscal and current account deficits is pressuring markets, though financial restrictions have facilitated the financing of the fiscal deficit.”

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