Finance minister Pranab Mukherjee on Monday set out a medium-term roadmap to return to fiscal prudence, targeting to reduce the fiscal deficit to 4.6% of gross domestic product (GDP) in 2011-12 and eventually bringing it down to 3.5% in the next two years.
The fiscal deficit for 2011-12 of R4,12,817 crore is proposed to be financed through market borrowings of R3,43,000 crore and the balance through a mix of treasury bills, external debt and other instruments.
Mukherjee also continued with the move to avoid issuing bonds instead of subsidies. “I have adhered to this decision, thereby bringing all subsidy related liabilities into our fiscal accounting,” the finance minister said in his budget speech.
The debt financing strategy for 2011-12 has been formulated after factoring in the comfortable cash position of the government in the current financial year as existing inflationary expectations in the economy.
The reduction in fiscal deficit may be seen in the context of change in policy the government introduced in 2010-11 not to issue bonds in lieu of cash subsidies to oil and fertiliser companies.
“It may be recalled that the effective fiscal deficit — including securities issued in lieu of subsidies to oil and fertiliser companies — had gone up to 7.8% of GDP in 2008-09,” the medium-term fiscal policy statement said.
At present, of the overall central government debt and liabilities, about 92% is domestic and only 8% is external debt. In 2011-12, the government would finance about 82% of deficit through dated securities at market determined interest rates.
The overall objective of the government debt management policy is to meet central government’s financing need at the lowest possible long-term borrowing costs and also to keep the total debt within sustainable levels.
“The government has firmly established the practice of providing petroleum and fertiliser subsidy in cash instead of securities. The government would like to continue with this practice of extending government subsidy in cash,” the fiscal policy statement said.
The government and the Reserve Bank of India had announced a series of measures through 2008 and 2009 including tax breaks in many products and interest rate cuts to help companies stay afloat with the help of cheaper loans.
Due to the policy interventions for inflation management and subsequently for providing a stimulus to growth, the government had to forego substantial revenues of about R42,000 crore.