This year while preparing the Union Budget, Pranab Mukherjee has his hands full. The fiscal deficit has ballooned and is expected to be way beyond the projected 4.6% of GDP, while the current account deficit for the current year is expected to be at 3.6%, which is as bad as when India was staring at a crisis in 1991. GDP growth is seen dipping to around 6.9%, which is way below the 8.4% reported last year.
The only silver lining for the government is that inflation in the economy has begun cooling off. However, it may just be a little too early to read into inflation numbers as the ongoing crude spike, may see inflation remain at elevated levels. What is important however is that inflation remains low and is sustained at these low levels.
Fiscal deficit a cause for worry
The fiscal deficit is expected to rise sharply and analysts estimate that it could end anywhere between 5.3% to 6% of GDP in the current year. The fiscal deficit has been rising on account of lower tax mop up and rising expenditure, particularly subsidies. Tax collections mop has been weak , largely due to the slowing growth in the economy.
Revenues from net taxes in the first 10 months of the current year is estimated at just 69% of budget estimates. While tax tax revenues have fallen the government has also not been able to mop up money through divestments. With the ONGC divestment that happened last week, the government has managed to raise a little over Rs 13,000 crore from divestment against the targeted Rs 44,000 crore. Thus the income side has been woefully short against targeted levels.
While on the income side it has been woefully shot in mops ups, on the expenditure side the subsidy bill has been a matter of concern. The subsidy bill is expected to be way beyond the Rs 200,000 crore that was estimated for this year, pushing the fiscal deficit even higher. The fuel subsidy has spiraled surpassing the estimated Rs 23,600 crore and had in fact crossed Rs 60,000 crore in January itself. With crude having risen sharply in the last few weeks, it may have even got worst by now.
Pranab Mukerhjee is expected to make hard choices, which may not necessarily be populist. He would have to take a hard look at subsidies, especially deregulation of diesel. The FM would also have to stop dolling out goodies in every form to reduce fiscal deficit. Steps to ensure fiscal consolidation would also help the RBI to reduce interest rates, which in turn can propel growth and better tax mop-up. A pragmatic and a growth oriented budget is a need of the hour. The government would also have to push through key reforms like DTC, GST and FDI in multi-brand retail.
If fiscal deficit does not reduce and there is no path of fiscal consolidation, expect major rating agencies to downgrade India and also expect interest rates to remain at elevated levels.