IF BETTER macro economic fundamentals earlier had helped the Union
government’s efforts for fiscal consolidation, a deterioration now has
dampened the move likewise. The ratio of fiscal deficit to gross
domestic product (GDP), which had fallen to 2.7% in 2007-08, has jumped
to 6% in the revised estimates for 2008-09 against the budget estimates
of 2.5%. The fiscal deficit is estimated at 5.5% of GDP in the interim
Budget for 2009-10.
The rise in fiscal deficit to GDP ratio has not come as a surprise. For, even before the government presented its interim Budget it was widely apprehended that tax collections in the current year would fall behind target following deceleration in corporate margins. This would mean more borrowings and in turn, higher fiscal deficits. And this has exactly happened – aggregate tax receipts of the Centre were lower by Rs 41,180 crore in the revised estimates for 2008-09 compared to what was projected at the time of presenting the Budget.
But even while the collections of tax revenue fell short of target, total expenditure has surpassed the budget estimates by a huge Rs 1,50,069 crore – up by about 20% from Rs 7,50,884 crore in the budget estimates to Rs 9,00,953 crore in the revised estimates for 2008-09. And how did the government meet this gap? By borrowing. Total borrowings and liabilities of the government, excluding receipts in respect of market stabilisation schemes, has surpassed the budget estimates by a massive Rs 1,93,225 crore – up by about two and a half times from Rs 1,33,287 crore in the budget estimates to Rs 3,26,512 crore in the revised estimates for 2008-09.
The outstanding liabilities of the Centre as a result, have gone up to a record Rs 31, 35,775 crore in 2008-09. This has been estimated to grow by another Rs 2, 70,547 crore in 2009-10. A huge amount by any standard. The interest liabilities of the Centre as a result, is projected to grow by Rs 32,817 crore in 2009-10 from Rs 1,92,694 crore in the revised estimates for 2008-09 to Rs 2,25,511 crore.
Much of the borrowed funds have been raised internally. The outstanding internal debt of the Centre has increased by 11.4% in 2008-09. The dependence of the Centre on internal sources, however, has been rising steadily over the years. The share of internal debt in total outstanding liabilities of the government has increased from about 61% in 2005-06 to 67% in 2009-10 Budget.
This has largely been done by borrowing directly from the market. The market borrowings of the Centre have grown sharply in recent years following the fall in interest rate. Aggregate market loans have increased by 24.4% in 2008-09 over the previous year and are estimated to grow by another 23.4% in 2009-10. The share of outstanding market loans in aggregate liabilities of the Centre has increased from 38% in 2005-06 to 43% in 2008-09.
But now as interest rate has risen, higher borrowings would increase interest liabilities more than proportionately. As such, interest liabilities account for a substantial part of the Centre’s non-plan expenditure, a further increase in interest liabilities would thus, not only inflate fiscal deficit but will also affect the government’s overall fiscal consolidation programme.
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