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Budget throws up deficit worries - Views on News from Equitymaster
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  • Jul 7, 2009

    Budget throws up deficit worries

    The Union Budget may not have met the major expectations of the stock markets. It may also not have really stood out in terms of having any significant positive impact on any section of the industry. But the real concern is the fiscal deficit as a percentage of GDP. The deficit zoomed to 6.2% in FY09 as the global economic slowdown impacted India's pace of growth, as a result of which stimulus measures had to be undertaken. What's more, this number is not likely to come down anytime soon. In fact, the FM has indicated that the fiscal deficit will form 6.8% of GDP in FY10, which has begun to send flutters across the country.

    While infrastructure development has been stressed upon in the budget and very rightly so, the fact remains that the government does not have much headroom in terms of raising resources for the same. Further borrowings will only exacerbate an already difficult situation. In light of this, while the government's focus on restoring India's growth to 9% of GDP may be laudable, the million dollar question is - will the fiscal deficit really allow India to grow the way it had done in the past? Readers would do well to recall that during the last two years when India had been logging in growth rates of 9% plus, the fiscal deficit situation had been under control at a little above 3%. Hence, for India to replicate its growth story, the fiscal deficit will have to be brought down.

    Surprisingly, no measures were announced by the FM in terms of how the government was planning to bring this down. With not much being done in terms of reducing subsidies and the credit crunch keeping interest rates high, the non-plan expenditure is only set to gallop. This has left little room to focus on infrastructure development, education and healthcare even though the FM has emphasized the importance of the same. Printing more money is not an option as that will only fuel higher inflation going forward. The FM's silence on the FDI front also does not bode well given that the same can play a significant role in enhancing the performance of the economy in the long term.

    India's rising deficit means that the possibility of its rating being downgraded cannot be entirely ruled out. If this happens, borrowings will have to be done at higher interest rates, which will further exert pressure on government finances. We do not want to sound like doomsayers, but the Government will need to quickly develop some blueprint which clearly specifies its strategy of bringing this deficit down. While one understands that the deficit may not reduce overnight, a clear direction will go a long way in upholding the credibility of the government. We hope the Finance Minister is listening!



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