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‘Deficit points to inflation threat’

The Reserve Bank of India (RBI) on Friday said key fiscal deficit indicators have worsened during the current fiscal year on account of rising subsidies, which has inflationary implications.

india Updated: Dec 16, 2011 21:46 IST

The Reserve Bank of India (RBI) on Friday said key fiscal deficit indicators have worsened during the current fiscal year on account of rising subsidies, which has inflationary implications.

“The central government’s key deficit indicators worsened during 2011-12 (April-October), primarily on account of a decline in revenue receipts and increase in expenditure, particularly subsidies... The likely slippage in this year’s deficit has inflationary implications,” the RBI said in its mid-quarter review of the monetary policy.

In the Budget, the government had proposed to bring down the fiscal deficit in 2011-12 to 4.6% of the GDP (Gross Domestic product) from 4.7% in the previous year. The task, however, appears difficult in view of the rising subsidy bill and the government’s inability to raise funds from divestment of equity in state-owned companies.

Finance Minister Pranab Mukherjee recently indicated that the subsidy bill during the current fiscal will exceed the target by R1 lakh crore and that maintaining the fiscal deficit at 4.6% of the GDP will be a “challenge”.

“The fiscal deficit at 74.4% of the budgeted estimate in the first seven months of 2011-12 was significantly higher than 42.6% in the corresponding period last year (about 61.2% if adjusted for more than budgeted spectrum proceeds received last year),” the RBI said.

Rising fiscal deficit, it added, could have implications for inflation, which is still close to the double-digit mark.