Shortfall in revenue is estimated to reach 6.8% of GDP next year

Shortfall in revenue is estimated to reach 6.8% of GDP next year
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First Published: Tue, Jul 07 2009. 12 30 AM IST

Strategy: Finance secretary Ashok Chawla says the government is acting as an automatic stabilizer for the economy by spending more. Ramesh Pathania / Mint
Strategy: Finance secretary Ashok Chawla says the government is acting as an automatic stabilizer for the economy by spending more. Ramesh Pathania / Mint
Updated: Mon, Jul 13 2009. 05 40 PM IST
New Delhi: A fiscal deficit that’s ballooning as the government tries to deliver a spending boost to the economy spooked financial markets on Monday and fanned concern that state borrowings would crowd out the private sector. The finance minister justified the deficit, estimated at 6.8% of economic output this fiscal, by asserting that the need to restore the economy to a high-growth path outweighed concerns about the deficit. Tax revenues, meanwhile, are slated to grow at a slower rate, reversing the buoyancy seen in tax collections in recent years. Mint looks at the state of government finances.
Strategy: Finance secretary Ashok Chawla says the government is acting as an automatic stabilizer for the economy by spending more. Ramesh Pathania / Mint
The government’s emphasis on ensuring the country’s economy returns to the 9%-plus growth rate seen in the three years before 2008-09 comes at a high cost: the explosion of the fiscal deficit. The shortfall in the government’s revenue relative to its expenditure is estimated to reach 6.8% of gross domestic product (GDP) next year, higher than market expectations of 6.5%.
The increase in spending to the unprecedented level of around Rs10 trillion is an ambitious example of Keynesian economics. John Maynard Keynes, the British economist, advocated big government spending in times of economic crisis and this Budget comes at a critical time, for India and the rest of the world.
Still, the Budget speech left one question unanswered, say analysts: Is today’s medicine for restoring growth mortgaging the future fiscal health of the nation? Ajay Shah, senior fellow at the National Institute of Public Finance and Policy, said the government was in an “unpleasant position” regarding the budget deficit, and likened India’s fiscal position to an overweight man. “He’s not going to die, but there is a lot of unpleasant stuff in his body,” said Shah.
Ashok Chawla, the country’s finance secretary, told a media briefing held after the Budget was announced, that government spending is necessary and is making up for a lack of spending by the private sector. Thus, the government is acting as an automatic stabilizer for the economy.
This is a risky strategy. Chawla said 6.8% was the latest estimate of the fiscal deficit, but it might not be the last. The government’s commodity subsidies could cause another fiscal headache.
In February, during the interim budget, the government estimated oil prices for 2009-10 at $70 (Rs3,374) per barrel. On Monday, Chawla declined to say if this had since been revised. If the price of oil spikes to over $100 per barrel, like it did last year, then the government’s subsidy bill would soar, taking the budget deficit with it. The same is true for food and fertilizer products.
The shortfall in the government’s revenue relative to its expenditure is estimated to reach 6.8% of GDP next year. Ahmed Raza Khan / Mint
Finance minister Pranab Mukherjee also announced that the fiscal deficit targets for the states would be relaxed during these tough economic times. States can now run deficits of 4% of their GDP. Thus, the consolidated deficit, one that includes states and Central, could increase to nearly 11% in the coming year.
The government’s targets to reduce the Central budget deficit to 4% of GDP by 2011-12 partly rely on an increase in non-tax revenues, primarily divestment of public companies and the auction of 3G broadband licences.
Shah said the government’s projections are fine, but that it could do more. “I think they numbers are too modest, if anything they could sell more shares in public companies (to remedy the fiscal problem.)”
A deficit of nearly 7% of GDP must worry a government that needs to attract foreign investors to plug the hole in its finances.
Credit rating agencies have already reduced their outlook for India’s local currency credit rating to negative from stable, and Shah said he thinks there is a high chance India could be further downgraded, leading to bigger problems in the future.
“If the private sector is not confident in India’s future that could have a massive impact on growth,” he said.
Graphics by Ahmed Raza Khan / Mint
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First Published: Tue, Jul 07 2009. 12 30 AM IST
More Topics: Budget 2009 | Pranab | GDP | UPA | Government |