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Fiscal deficit seen below 5% next year
January, 13th 2010

The government may be able to contain fiscal deficit below 5% levels in the next financial year, helped by higher revenue collections from a buoyant economy that is expected to grow at around 9%.

Chairman of the prime ministers economic advisory council chairman (PMEAC), C Rangarajan, said on Saturday that the fiscal deficit in the next financial year could come down by up to 1.5 percentage points due to higher revenue inflows. A number of stimulus measures taken by the government in the last financial year to boost demand in the economy had pushed the deficit to a 16-year-high level of 6.8% of the gross domestic product.

Rangarajan seems to have based his forecast on the PMEAC estimate of 7.75% growth for the current year. But data pouring in at the fag end of the year have prompted finance minister Pranab Mukherjee to raise growth forecast to 8% for the year. The finance minister has hinted at the possibility of the government meeting the revised direct tax target of Rs 4 lakh, helping the government to a shortfall in indirect tax collections. With the prime minister estimating around 9% growth in the next fiscal year, the government is expected to collect higher revenues to further bring down the deficit.

The governments fight against the ballooning fiscal deficit could get an unexpected boost from a higher transfer from the Reserve Bank of India. The central bank, which provided Rs 25,000 crore from its profits to the government in the current fiscal year, may be in a position to transfer a higher amount as it is close to meeting its targeted reserves, maintained to take care of contingencies and development needs.

RBI transfers part of its profits to the government in June at the end of its accounting year. The central banks profits come from gains through market intervention and refinancing of banks. In 2010-11 , the central bank may not set apart much money for building the reserves as the size of the reserves now accounts for 11.89% of RBIs assets, which is very close to its 12% target, said Sujan Hajra, chief economist at Anand Rathi Financial Services.

The ratio of assets to reserves will remain high in RBIs current accounting year, as the central banks assets remain at last years levels due to low reserves that commercial banks have kept and the unwinding of market stabilisation bonds, he said.

In the last accounting year, RBIs gross total income rose 5% to Rs 60,731 crore from Rs 57,750 crore in the previous year. Since October 2008, RBI has cut the cash reserve ratio, the interest-free reserves banks keep with the central bank, by 400 bps from 9% to 5%.

However, a possible increase in commodity prices may upset the governments expectations on the revenue front. With the prices of commodities going up at a time when the pricing power of manufacturers are under pressure on account of weak demand, I do not expect a dramatic pickup in revenues, said Indranil Pan, chief economist at Kotak Mahindra Bank.

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