Union Finance Minister P. Chidambaram is all set to report a fiscal deficit of 4.65 per cent of the Gross Domestic Product for the current fiscal when he presents the Vote-on-Account in the Lok Sabha on February 17.
Highly-placed Finance Ministry sources told The Hindu that Mr. Chidambaram would tell Parliament that the Union government managed to contain the deficit within 4.8 per cent, the “redline” he had drawn in the Budget for the current fiscal.
The Finance Ministry’s “expenditure squeeze” on flagship social schemes and a “slight improvement” in tax collection over the past few weeks, the sources said, were helping it keep the deficit out of the red.
The fiscal deficit could be seen as being of a “poor quality and not truly reflective of India’s finances,” the sources added as “the government has not reformed the way it manages the fisc. The carryover of fuel subsidies is of a greater magnitude than in the past; not exactly a good practice.”
As the government accounts for the subsidy expenditure incurred in the last three months of a financial year in the subsequent year, the task of finding the resources to foot the bill for the UPA’s subsidy policies will fall on the new government. State-owned companies, especially oil and urea PSUs, said they were unable to fund business expansions owing to accumulated burden of subsidies the government was yet to reimburse.
The government has also sucked out dividends from profitable PSUs.
When contacted for comment on the nature of the fiscal deficit performance, global rating agency Moody’s Analytics Senior Economist Glenn Levin said: “If and when the budget blows out, it could add to financial volatility, especially in a world of declining liquidity.”
The fiscal deficit performance is being closely watched by global ratings agencies, some of which have even warned of a sovereign downgrade unless governance improves.
“The fiscal deficit hit 94 per cent of the government’s target by November. With four months still to go and election round the corner, there is absolutely no way they are going to stay within target,” said Mr. Levin.
The Finance Ministry has slashed by about 12-15 per cent the funds promised to social welfare schemes and plan allocations in the Budget last February.
According to one estimate, Mr. Chidambaram may cut Rs.70,000 crore from allocations and push to next fiscal reimbursements of about Rs.40,000 crore to oil PSUs for subsidies.
Last year, efforts to meet the fiscal deficit target forced a Rs.100,000 crore cut in plan expenditure.