Fiscal deficit soars as slowdown deepens

Government’s finances continue to worsen as the fiscal deficit for the April-December period touched 164% of the budgeted target for whole fiscal. Past nine months of the fiscal have been one of the most difficult periods for fiscal management in the post reform era of Indian economy.

Commodity and crude rally in first half of the fiscal forced government to spend much higher amounts in form of subsidies on retail sale of fuels and fertilisers. As if the exceptional growth in these poorly targeted subsidies was not enough, the sharp downturn in global economy that begun in second half of the fiscal has so far forced the government to release two fiscal stimulus packages which involved cut in taxes along with additional commitment of expenditure on both plan and non-plan fronts.

As a result, fiscal deficit in the first nine months of the current fiscal rose to Rs 2,18,262 crore, outstripping the budgeted target for whole fiscal by 64%. Fiscal deficit in simple words measure the expenditure by government over and above its income. As a percentage of gross domestic product, the government has so far spent an amount equal to 3.63% of projected GDP for whole fiscal in excess of its income.

With three more months to go, government is well on track to record a deficit of around 5% of the GDP for FY09. The situation may not reverse after March despite the fact that crude and fertiliser subsidies will be much lower due to crashed commodity prices. This is because the deepening slowdown, as is being projected by most economists around the world, will necessitate much greater fiscal brevity from government than shown in current fiscal.

A priori, the news does not look too bad as in time of a slowdown expansionary budget helps over come recessionary forces and acts counter cyclic. However, too high levels of deficit can derail India’s growth story in medium run. Government therefore has tightrope walk ahead of it. While it will have to spend extra to get the economy out of the current slump, it also needs to ensure that the measures do not harm the medium run growth potential of economy.