Why Finmin fears El Nino?

Pranab mukherjee is in a dilemma these days – should he allow the fiscal deficit to soar high or should he apply brakes and impose some degree of fiscal discipline. It’s a tough choice for all that the aam aadmi wants is a popular budget (not using the term populist budget as it sends negative connotation). Thanks to the accelerated public spending and a dwindling revenue collection, the fiscal deficit for the first month of FY 2009-10 has shot up to 16.3% of the projected full year budget deficit of Rs.3.32 trillion. The irony is that even this figure is elusive as it doesn’t take into account the off budget liabilities like the fertilizer subsidy and compensation to state-run oil companies. On a comparative basis, the total spending in April 2009 amounted to Rs.662.17 billion (up 43% from Rs.463.33 billion in CPLY) while the net tax receipts fell 32% to Rs.74.62 billion from Rs.109.63 billion last year. In fact, the tax GDP ratio, which had seen a steady rise through the boom years slipped to 11.4% in FY 2008-09 from a peak of 12.3% a year earlier. Economic think tank Centre for Monitoring Indian Economy (CMIE) attributes the lower tax collection to post-budget announcement of cuts in excise duty and service tax. The government, in its interim budget, had pegged the gross fiscal deficit at 5.5% of the GDP (lower than the 6.1% ratio in 2008-09); but given the scenario, the ratio is expected to remain higher than the budgeted estimate in 2009-10. “There is a possibility that India’s fiscal deficit would increase by 1% of GDP from the level expected by the interim budget,” forecasts the S&P report. El Nino can possibly favour the Aussies in the upcoming Ashes Series but for the finance minister, it can possibly shower fresh bout of trouble as he strikes to balance fiscal prudence and populism.

Gyanendra Kashyap

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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