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Growth gives FM room to borrow more
January, 05th 2011

Finance minister Pranab Mukherjee can borrow freely in the last three months of the fiscal year and yet remain within the right side of the budgeted fiscal deficit of 5.5% of the gross domestic product, thanks to better-than-expected economic growth in nominal terms.

Of course, he could choose not to borrow more and pat himself on the back as he shows a sub-5 % fiscal deficit when he presents the budget on February 28.

Nominal growth numbers are not adjusted for price changes. The widely-watched measure of GDP is the real growth, adjusted for inflation.

All deficit ratios will benefit due to high nominal growth, said DK Joshi, chief economist at rating agency Crisil . In its budget estimate for 2010-11, the government had assumed a 12.5% growth in nominal GDP. The net borrowing or the fiscal deficit of Rs 3,81,000 crore translated into 5.5% of the GDP.

These calculations, however, may not hold good now as the nominal GDP expanded 22% in the first half of the current fiscal. If this growth rate is maintained in the second half, the budgeted borrowing would amount to only 5% of the GDP.

The government has already lowered the borrowing target by Rs 10,000 crore to Rs 1,63,000 crore in the second half of the current financial year.

As fiscal deficit numbers are in current rupees, they are compared with the nominal GDP at current prices and market prices.

The nominal GDP has risen significantly for two reasons high inflation, which has been in double digits most of the year, and a revision in numbers due to the shift to a new inflation index.

If the government chooses to exploit the statistical boost, it has the room to borrow another Rs 30,000 crore without breaching the fiscal deficit limit.

Strong tax collections will also help the government manage its finances amid rising threats. Indirect tax collections are up 50% in the first eight months of the current fiscal from a year ago. Direct tax collections have grown at a more sedate pace of 18% during this period.

At this rate the government could comfortably exceed its revenue target of Rs 7,46,000 crore in the current fiscal. This could come handy in case the recent rally in the crude prices forces the government to compensate a larger amount to the oil marketing companies for selling diesel, cooking gas and kerosene at prices below cost.

The price of Indian crude basket a mix of Oman & Dubai sour grade and Brent for sweet grade in the ratio of 62.3:37.7 has risen to an average of $89.16 a barrel in December, up from $84.26 a barrel in November.

International fertiliser prices are also on the rise, forcing the department of fertiliser to seek Rs 30,000 crore of extra subsidy in the current fiscal.

The extra Rs 55,000 crore the government raised from the auction of 3G and broadband spectrum has already been accounted for through two supplementary demands through which an additional spending of Rs 75,000 crore has been proposed.

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