The government is expected to end 2006-07 with a much lower fiscal deficit, or gross borrowings, than the revised estimate of 3.7% of gross domestic product (GDP). A senior finance ministry official, who did not wish to be identified, confirmed that the fiscal deficit is likely to drop on account of higher revenues as well as a tight rein on expenditure. Independent experts Mint spoke to offered a figure ranging from 3.2% to 3.6% of GDP for the fiscal deficit.
The deficit for 2006-07 was budgeted to be 3.8% of the GDP, or Rs1.49 lakh crore. But while presenting the Union Budget 2007-08 on 28 February, finance minister P. Chidambaram came up with a lower revised estimate of 3.7%. The fiscal deficit had risen nominally to Rs1.52 lakh crore, but the finance ministry was still within the target because the GDP, too, had grown.
Experts are confident of the government bringing the fiscal deficit down to 3% of GDP by 2008-09, as required by the Fiscal Responsibility and Budget Management Act, though achieving the revenue-deficit target of zero would be difficult. Shashank Bhide, senior research counsellor, National Council of Applied Economic Research, said, “since the current fiscal’s target is 3.3%, getting 3% next year should not be difficult at all.”
As per the latest estimates by the Controller General of Accounts, the fiscal deficit for the eleven months of the last fiscal (April to February) was Rs1.22 lakh crore, 20% less than the revised estimate. In absolute terms too, this fiscal deficit is lower than the Rs1.32 lakh crore registered over April-February 2005-06.
Even in terms of total expenditure, only 81% of the revised estimate of Rs5.82 lakh crore had been spent till February. It is unlikely that the remaining 20% or Rs1.16 lakh crore would have been spent in March in the light of the finance ministry’s stringent controls to curb non-plan spending. Among these are rules that forbid departments from spending over 30% of the year’s target in the last quarter and over 15% in the last month.
This leaves room for a likely saving of 5% or Rs29,000 crore in expenditure, although only a portion of it may materialize considering the government usually spends more than budgeted for.
The Centre has also benefited from the fact that total tax collection last fiscal surged to Rs4.7 lakh crore, compared with revised revenue estimates of Rs4.65 lakh crore. However, M. Govinda Rao, director, National Institute of Public Finance and Policy, feels tax revenue alone would make little difference to the deficit.
According to India’s chief statistician Pronab Sen, who maintained that the fiscal deficit would be 3.6% of GDP, the final number will also depend on the final GDP. The nominal GDP, which does not discount for inflation, for 2005-06 was Rs32.5 lakh crore.
However, the most optimistic estimate of the fiscal deficit is by HSBC Ltd, which expects a fiscal deficit of only around 3.2% of GDP. The bank’s economist, Robert Prior-Wandesforde, said, “The March figures would have to be extraordinarily bad to get anywhere close to the government’s 3.7%. Buoyant corporate tax receipts explain much of the improvement, although capital spending has undershot the government’s target.” He added, “this could give room for a budgetary boost over the coming months if there are clearer signs of slowdown.”
A lower deficit could also allow the government to increase capital spending in the current year, especially since real-GDP growth is widely expected to slow to at least 8.5%, compared with the budget assumption of 9% real-GDP growth with 4% inflation.
“It will be definitely more like 8.5% real growth and 5% inflation, if not worse,” said Sen. The annual inflation based on the wholesale price index for the last fiscal was 5.74%.