There is a lot to be glum about these days: weakening economic growth, high inflation and the possibility of a sovereign downgrade.
An economic turnaround is dependent on several factors, but there can be no doubt that fiscal consolidation is one of them. The news here is not happy either.
Data compiled by Emkay, a brokerage, in a recent research note, points out that at Rs1.9 trillion, the net borrowing of the Centre during the first two months of fiscal year (FY) 2013 is 61% higher than what it was in FY 2012. It is also 40% of the budgeted net borrowing target of Rs 4.7 trillion. This compares with an average level of 30% during FY09-FY12.
This initial data suggests that the government will struggle to meet its fiscal deficit target of 5.1% of gross domestic product — 80 basis points lower than the actual deficit it ran up in FY2012.
The government budget will face a lot of headwinds this year. Tax collections could be weak because of slowing growth. Getting the subsidy bill under control will be a huge political challenge, though the recent decline in global crude oil prices does offer some relief. Asset sales in a tough market will be a challenge. And there will always be new spending proposals as the next general elections approach.
It could be argued that too much should not be read from the high level of sovereign borrowings in the first two months. The government has traditionally front-loaded its borrowing programmes in the first half of a fiscal year, when private sector demand for credit is relatively weaker.
The spurt in borrowing could be a tactical move. According to data compiled by economists at ING Vysa, redemptions worth Rs 856 billion (95% of total annual redemptions) are due in the first half of this year alone, adding to the strain on public finances. Eventually, the government must get its act together and move towards a lower fiscal deficit, by decontrolling all fuel prices and reducing non-plan expenditure.