Social sector spending, fiscal stimulus to keep deficit high

Fiscal deficit is likely to be 6.1%, as against earlier target of 5.5%

GN Bureau | February 9, 2010


Finance Minister Pranab Mukherjee addressing a pre-budget meeting in New Delhi
Finance Minister Pranab Mukherjee addressing a pre-budget meeting in New Delhi

The fiscal deficit for the next financial year is likely to be more than 5.5% forecast earlier as the government is keen to step up expenditure on agriculture and social sectors, official sources said.

Slower-than-envisioned unwinding of fiscal stimulus is another factor that is prompting finance ministry circles to keep the fiscal deficit target at 6.1% of GDP.

In recent weeks, Finance Minister Pranab Mukherjee has reiterated the need to move towards fiscal consolidation and  cut fiscal deficit to 5.5% of GDP in 2010-11 and 4.0% in 2011-12 from this year's estimated 6.8%.

However,there is every likelihood that government might not push hard to lower fiscal deficit so as not to impede growth revival, an official familiar with the budget exercise says.

The finance minister will present the budget on February 26.

In all probability, fiscal deficit may be pegged at 6.1% of GDP and it looks improbable that the budget may target a lower fiscal deficit of 5.5% of GDP, says another official.

The fiscal deficit target for 2010-11 will "certainly lower" than this year's but not "significantly lower" as projected earlier. The finance minister is being pressured by the industry not to hurriedly roll back fiscal stimulus measures until economic recovery takes firmer roots. They want it to continue for one more year.

If Mukherjee accepts this plea, sops worth Rs 60,000 crore by way excise, customs and service tax cuts would continue for one more year. These were offered to ward off adverse impact of slowing external demand and financing due to recession in the developed economies.

The industry sources said some in the finance ministry think that the rollback of tax sops should be partial and excise duty and service tax should be raised by 2% wherever they were cut as part of the stimulus.

Others argue that even 2% increase in those sectors should not be attempted, particularly in export-related areas where the recovery was fragile, the sources said.

They argue that it is more important to push growth to 8-9%, which by itself would give more revenue through higher tax collections, reducing fiscal deficit to that extent.
 

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