Fiscal Deficit

The Finance Minister, though has been appreciated for being honest about the government’s fiscal deficit in his budget, without trying to paint a rosy picture, but he himself has admitted that the fiscal deficit this year will cross its budgeted estimates substantially and will continue to be on the upside in the next fiscal as well. Fiscal deficit has overshot its budgeted estimate of 4.6% of GDP in FY 12 by a good percentage point and is expected to be around 5.9%, however it has been pegged lower at 5.1% of GDP for FY ‘13.

The scaling down of the deficit from 5.9% to 5.1% in FY 13, looks reasonable but some say it may not be realistic as we may actually see a number close to 5.5% by the end of next year. As per the FM the fiscal deficit shot up its estimates primarily due to a rise in the subsidy bill for petroleum and fertilizer. Although he has not made any specific attempt to curb this burden, the budget has also not seen any announcements in terms of big ticket government schemes. In fact a cap of 2% on expenditure of subsidies has been targeted for the next year which may actually help the government in keeping its subsidy bill under check. Over the next three years, it has proposed to bring down the subsidy burden further to 1.75% of GDP.

On the revenue side, the Budget has attempted to increase its revenue through an increase in indirect taxes instead of increasing the direct taxes. Service tax and excise duty rates have been hiked form 10% to 12% and the service tax base has been widened.

Going forward, the fiscal deficit target could however come under pressure if the Parliament passes the Food Security Bill and if the global crude oil prices go over $115 a barrel. The government will also have to go in for gross market borrowings of Rs 5.70 lakh crore, which is 11.5% higher than Rs 5.10 lakh crore estimated for this financial year.