Deficit to swell beyond new target

Tags: News

Official sources say 5.3% target looks tough in view of revenue, expenditure trends

India’s fiscal deficit could miss the revised official target and swell to as much as 5.6 per cent of GDP, a top government official told Reuters on Thursday, making it tougher for the government to avoid a credit rating downgrade.

The comments were the gloomiest scenario for public finances yet given by the government and follow a failed auction of mobile phone spectrum last week that dashed its income forecasts.

Global rating agencies have threatened to downgrade India’s sovereign credit rating to junk, if it fails to rein in its deficit, which is ballooning because of higher spending on food, fuel and fertiliser subsidies and poor tax receipts.

Just last month, finance minister P Chidambaram raised the fiscal deficit target to 5.3 per cent of GDP for the current financial year to end-March 2013 from a previous target of 5.1 per cent.

“Looking at the current trends in revenue and expenditure, 5.3 per cent looks tough,” said the official, who has direct knowledge of the government finances.

“There could be a shortfall of about Rs 500 billion in revenue receipts,” the official said, explaining that would add 0.5 percentage points to the original 5.1 per cent target.

A second official agreed with that assessment. Both officials declined to be identified citing the sensitive nature of the information.

In setting the revised 5.3 per cent deficit target, the government was banking heavily on generating billions of dollars from the auction of second-generation (2G) mobile phone licences. But the auction last week yielded just under 25 per cent of the targeted Rs 400 billion.

The government plans to have an auction of still-unsold telecom spectrum before March. But the first official said even with that auction, the government could at best garner only Rs 200 billion for the full fiscal year.

That could force the government to borrow an additional Rs 400 billion from the market, the official said, in the most negative borrowing scenario the government has yet given.

Private economists polled by Reuters earlier this month had estimated the government would need to borrow this amount, but only if the deficit hit 5.8 per cent. Heavy government borrowing is seen as a drag on economic growth, because it drives up borrowing costs for private investors.

After the auction last week, Chidamabaram said he was still confident India could hit the 5.3 per cent deficit target.

Bond yields rose on the Reuters report. The benchmark 10-year bond yield rose to as high as 8.23 per cent, up 3 basis points from levels before the news. The yield was last trading at 8.22 per cent compared to its 8.21 per cent close on Wednesday.

New Delhi is on track to borrow Rs 5.7 trillion, or 5.6 per cent of GDP, by February. Every 0.1 percentage point increase in the deficit is estimated to result in an additional market borrowing of at least Rs 100 billion.

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