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FM keep deficit at 6.5%
February, 03rd 2010

Finance minister Pranab Mukherjee will start with a big statistical advantage when he presents the budget for 2010-11 , which is expected to outline an aggressive roadmap for fiscal consolidation. Thanks to the revision in the base year to 2004-05 for national accounts from 1999-2000 , the fiscal deficit for the current year is likely to drop to 6.5%, other things being equal.

With the revision in the base year, the GDP at market prices for 2008-09 is estimated at 55,74,449 crore as against Rs 53,21,753 crore estimated in the earlier series and used in the fiscal deficit calculations in budget for 2009-10.

The government had assumed a 10.05% growth rate in GDP (at market rates). If the same rate of growth is assumed for the current fiscal, then the absolute GDP at market prices will be 61,59,766 crore in the new series, against Rs 58,56,569 crore assumed in the budget.

Assuming that the fiscal deficit remains at Rs 4,00,996 crore, on a higher GDP the deficit as a percentage will drop to 6.5%, against 6.8% provided in the budget, giving the FM a straight statistical advantage of 0.3 percentage points.

To put it simply, with this upward revision in the countrys income under the new series has brought down the fiscal deficit relative to the GDP. However, this is only a statistical comfort that does not allow the country to escape the consequences of the high fiscal deficit if it were not reined in quickly. Pronab Sen, countrys chief statistician said that the change in base year does bring some statistical advantage but it was nothing dramatic.

Thus, this statistical advantage is unlikely to change the thinking of the key policymakers in the government that India showing strong signals of revival now needs to apply brakes and curtail spending. This is just a statistical benefit... the government should start tightening now and come out with a credible strategy in place for reducing its fiscal deficit, said D K Joshi, principal economist, Crisil.

Indeed, officials in government feel that the forthcoming budget will be aggressive on fiscal consolidation as policymakers cannot allow the situation to deteriorate further , a senior government official privy to the discussions told ET.

The government wants to make a strong statement on returning to fiscal discipline in the budget, he added.
High fiscal deficit will put pressure and interest rates and thereby stifle private investment . Also, any further worsening in the countrys public finances will leave the government ill-equipped to tackle any future external shocks. The governments borrowing for the current year is pegged at over Rs 4 lakh crore.

Such large borrowing can put pressure on interest rates when demand for private credit picks up.

Mr Mukherjee had pegged the fiscal deficit , which is the difference between the governments total expenditure and its total receipts less borrowings, at 6.8% for the current financial year, pressing the pause button on fiscal discipline to provide stimulus to the economy hit by global crisis.

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