It is no secret that India's fiscal deficit is out of the government's control. The country's fiscal deficit has grown almost four-fold in the last five years. Government finances are in disarray largely because of a mounting subsidy and interest payment burden. Looking at the growing fiscal deficit, rating agency Standard and Poor (S&P) revised its outlook on India's long-term rating, which had been stable, to negative. Moody's had also cautioned that a high fiscal deficit could pull down the growth in the coming years. However the global rating agency reaffirmed sovereign credit rating of India at Baa3, which indicates investment grade, with a stable outlook.
This prompted the government to take serious look at the fiscal deficit problem. The government has rolled out the fiscal deficit road-map for the 12th five year plan and has announced steps to keep it within the range. It estimates fiscal deficit to come down to 3% of the GDP by 2016-17. For the current year, the deficit is estimated at 5.3%, up from earlier estimate of 5.1%.
And now it seems that the efforts to control the swollen fiscal deficit are finally paying off. India's fiscal deficit during the first nine months of FY13 has come down to 78.8% of the budget estimates (BE) compared with 93.1% a year ago period. This is partly seasonal, but also reflects the ongoing clampdown on expenditure and robust indirect tax receipts.
In a renewed effort to revive growth, the Indian government has since September taken measures to allow greater foreign direct investment in sectors such as retail and civil aviation, as well as increased state-set prices of diesel to reduce subsidies that strain its finances. Last month, the government also liberalized the price setting mechanism for diesel, allowing state-run retailers to make small but periodic increases.
Thus if the government slashes plan expenditure by 28% in the fiscal year to March 2013, as reported in the various sections of media, and postpones subsidy payments, then the revised fiscal deficit target could be within reach. Lower fiscal deficit and better credit rating could be a pleasant surprise for India Inc. in the new financial year.