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Economists see 6-7% fiscal deficit
December, 27th 2011

The Centres fiscal deficit touched 6.7 per cent of gross domestic product (GDP) in the first half of 2011-12 itself.

With not much hope on robust tax collections and disinvestment, economists peg the gap between the governments expenditure and receipts to be between six and seven per cent for this financial year.

If this happens, the fiscal deficit will reach the 2009-10 level, when stimulus was not even partly withdrawn. This time, the level will be reached despite the government not giving any stimulus to the slowing economy.

But then, on the tax front, much of the stimulus stays, as the government has raised the excise duty by two percentage points, from the six percentage point cut it gave to boost the economy at the time of the global financial crisis. The two percentage point cut in service tax is there. But expenditure growth has seen a decline from the times of meltdown.

Even the Reserve Bank of India has raised doubts on the governments fiscal deficit target of 4.6 per cent. Fiscal deficit has already touched 74.4 per cent of the BE for 2011-12 in the first seven months. Data for November will be out this week.

The fiscal deficit will touch seven per cent of GDP in 2011-12. With high oil prices, rupee depreciation and lower collections, the deficit will go out of control, said Siddharth Shankar, director, KASSA.

Arun Singh, senior economist at Dun & Bradstreet, said the deficit would certainly not be 4.6 per cent, but the second half would be better than the first, with tax collections going up. Advance tax collections come up in the second half, and the government has no room to spend now, he said.

Singh pegged the deficit at close to six per cent. He said there was always a shortfall in planned expenditure, carried forward to the next year, which would help containing the fiscal deficit this year, as well.

Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry, said with some disinvestment possibility arising, the second half would surely be better than the April-September period.

The overall fiscal deficit will be six per cent of GDP or below, he said.

At six per cent, the fiscal deficit will be at the 2009-10 level, when stimulus existed for the slowing industry. However, it would be much less than the 8.2 per cent witnessed in 2008-09, when India saw the impact of the global financial crisis after the collapse of Lehman Brothers.

Madan Sabnavis, chief economist, CARE Ratings, projected the deficit at 5.5 per cent, but with an upward bias. He maintained the government needed to follow the Keynesian model and spend to boost growth rather than worrying much about the fiscal deficit. Due to the overall slowdown in the economy, the private sector is not spending. So, the only entity that can do investment is government, as it is able to borrow at 8-8.5 per cent.

Sabnavis said other countries were running much higher deficits, and with India being a developing country, the government needed to spend.

The governments recent action of floating a vehicle to pledge shares owned by Specified Undertaking of the Unit Trust of India (SUUTI) has not impressed many in terms of meeting the divestment target of Rs 40,000 crore.

Analysts feel SUUTI would only enable the government to meet half of its disinvestment target. In the first seven months, the government achieved disinvestment of just over Rs 1,100 crore.

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