Fiscal deficit at new highs, but govt hopeful | business | Hindustan Times
Today in New Delhi, India
Jan 16, 2018-Tuesday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

Fiscal deficit at new highs, but govt hopeful

When Finance Minister Pranab Mukherjee met business leaders on Monday to discuss the upcoming budget, the Confederation of Indian Industry made an unusual suggestion – it advised the government to refrain from reducing tax rates for India Inc.

business Updated: Jun 01, 2009 21:47 IST

When Finance Minister Pranab Mukherjee met business leaders on Monday to discuss the upcoming budget, the Confederation of Indian Industry made an unusual suggestion – it advised the government to refrain from reducing tax rates for India Inc.

Nothing illustrates the severity of the government fiscal health better than the CII’s stance at the pre-budget meeting, which was often used by in the past to push for more concessions for the industry.

Data released during the weekend showed that the central government’s fiscal deficit rose more than two-and-half times from a year earlier to Rs 330,114 crore in 2008-09, or 6.1 per cent of the country’s gross domestic product. And the figure doesn’t include off-budget liabilities like fertiliser subsidy and compensation to state-run oil companies that could add up to another 4 per cent of GDP.

Fiscal deficit is the gap between the government’s revenue and expenditure.

At 10 per cent of GDP or more, it has not only undone the gains made through the past decade (see graph), but has now reached a level similar to what had pushed India in 1991 into its worst economic crisis since Independence.

The government insists the slippage is temporary and that it would restore fiscal prudence – as it did for most part of this decade – once the economy returns to high growth. In a recent interview to HT, Mukherjee indicated he could risk a higher fiscal deficit and spend more if that helps revive the economy faster.

But it appears now that the finance minister would have to start tightening the budget strings much before the Indian economy gets into the pink of health.

Already there is talk of disinvestment in public sector companies and auction of 3G spectrum that could help raise additional resources.

The upcoming budget might list a couple more measures, because tax revenues are likely to remain sluggish for several quarters with companies struggling to improve profitability.

The tax-GDP ratio, which rose steadily through the boom years on the back increased tax payment by companies, slipped to 11.4 per cent in 2008-09 from a peak of 12.3 per cent in 2007-08.

In the past three weeks, the government has borrowed nearly Rs 45,000 crore, or 25 per cent more than what it was scheduled to raise, from the market. The extra borrowing has added weight to a growing view that the scope for further cuts in interest rates might be getting limited.

“There is a risk of government borrowing crowding out private borrowing,” said Venu Srinivasan, president, Confederation of indian Industry (CII). That is precisely why CII and other business groupings are not asking for any reduction in tax rate or more fiscal stimulus.