India's Fiscal Deficit Higest in World - still increasing

India is one of the fastest growing economies in the world. The foreign exchange reserves reach a new high every week (($314 billion), inflation has not been controlled due to hike in the price of crude oil (nearly $135) and interest rates continue to be low. Indian fiscal deficit is the highest in percentage among the other countries of the world.

What is fiscal deficit?

Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.

India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07. The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09, but looking at the way things are going, economists say, it is unlikely the government will meet its target

India's fiscal deficit continues to be among the highest in the world and underlying pressures are not entirely showing up in headline fiscal numbers, Reserve Bank of India Governor Y. V. Reddy said.

Earlier in the Budget 2008 - 09 document, the government's revenue expectations are realistic, but expenditure appears to be underestimated. This may be because expenditure to the tune of 2.0-2.5 per cent of GDP remains off budget. There is no provision in the budget for the loan waiver of $16.8 billion to the farmers (earlier Rs.60,000 crores and now it is increased to Rs.71,680 crores) and huge amount of $6.36 billion arrears to the Central Government employees (Rs.27145 crores for the Central sixth pay commission recommendations), which is expected to 1.85 per cent of the official GDP for 2008-09. The loan waiver scheme will benefit 3.69 crore small and marginal farmers and 59.75 lakh other farmers. This is the vote bank for the next 2009 general elections to the Congress Party.

The budget 2008 - 09 document also says that the Plan expenditure is going to rise by around Rs 38,000 crores or around 19 per cent. Non-plan expenditure will rise by a much smaller amount, by Rs 64,806 crore or 17 per cent. The actual figure may be much higher.

The fiscal deficit for 2008-09 is forecast at 2.5 per cent of GDP, lower than the deficit for 2007-08 of 3.1 per cent of GDP for 2007-08, and also lower than the 3 per cent of GDP mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. It is highly unlikely that the government will achieve its forecast.

While net borrowings for 2008-09 have been budgeted at Rs 1 trillion and the gross borrowing estimate is at Rs 1.45 trillion. Critically, it does not include oil bond redemptions of Rs 13000 crores. It remains to be seen how the government finances maturing oil bonds. Therefore there appears to be a considerable upside risk to market borrowings for 2008-09. Though aimed populist in nature, many of the announcements made could fuel inflation and put pressure on the fiscal deficit in 2008-09.

Economists point out that all oil bonds and a part of fertiliser bonds are not accounted for in the Budget. This means that the government does not have to include these expenses while calculating the surplus or deficit for the year.

Subir Gokarn, Asia Pacific economist at rating agency Standard & Poor's, says that oil bonds are just liabilities and not real expenditure for the government and hence, technically, they cannot be added to the fiscal deficit.

Tax collections were at a record Rs 5,88,000 core in 2007-08 helped by robust economic growth and corporate profitability. However, with growth likely to slow down in 2008-09, it remains to be seen whether the same buoyancy will be maintained.

Also, not every expert believes fiscal deficit is worrisome. Dr Ashima Goyal, professor at Indira Gandhi Institute of Development Research, believes a high fiscal deficit is an indication that the government is spending more on "productive expenditures."

"We are seeing the centre's fiscal situation is improving but I think there are several underlying fiscal pressures not entirely evident in the numbers," Reddy told a conference in New Delhi on 26 May 2008.

India aims to bring down its fiscal deficit to 2.5 percent of GDP for the 2008-09 financial year, compared to 3.1 percent in 2007-08, but financial analysts fear a $17 billion scheme to write off the debts of millions of small farmers and tax cuts could trip up efforts. According to the Fiscal Responsibility and the Budget Management Act operationalised in 2004-05, the government must reduce its fiscal deficit to 3 pct of GDP and wipe out its revenue deficit by 2008-09.

But it has already missed its revenue deficit target and expects it to be 1 percent of GDP in the year to end March 2009. Reddy said the fiscal deficit as a percentage of gross domestic product continues to be among the highest in the world.

Market borrowings finance more than half of the gross fiscal deficit and the rest of the gap is filled by small savings, provident funds, reserve funds and deposits and advances.

The gross fiscal deficit covering both state and central government is estimated at 5.5 percent in 2007-08, according to official estimates, down from 9.5 percent in 2002-03.

Fiscal deficit will be more in the coming months due to oil prices. Crude oil price of $35 per barrel in BJP government has been increased to $135 in Congress government which is nearly $100 difference per barrel. Congress Government is searching many options to recover the loss of PSUs and trying to reduce other taxes and duties. Increase of each one dollar hike in crude oil will give huge loss of Rs.3000 crore to Public Sector Undertakings. Central Government has no option except to increase the prices of petrol, diesel and gas for recovering some extent of losses