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By: Bharat Ratna

India Deficit: InformationIndia 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 on
Monday.

Earlier in the Budget 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 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

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