India's fiscal deficit - deficit arising when a government's total expenditure exceeds the revenue that it generates - in FY12 had shot up to high level of 5.76% of GDP. It has crossed the comfort levels largely due to the high food, fuel and fertilizer subsidies. At the start of the current fiscal year, the government aimed at lowering this figure to 5.1% of GDP by March 2013.A few months into FY13 and it already seems to be going off track. High inflation, slowing growth and increasing subsidy bills - are all factors worrying the finance ministry. In fact, Finance Minister P. Chidambaram had recently commented that the deficit target would have to be reassessed during after the mid-year review.
As per the data released last week, India's fiscal deficit for the first four months of FY13 reached Rs 2.6 trillion - a figure which is more than half of the target for the full year.
Similar to last year, the government is expected to dole out huge sums (Rs 600 bn according to some estimates) to oil marketing companies. This is higher by 50% than what was budgeted. One desired action here would be to decontrol diesel prices. However, political compulsion has made it difficult for the government from doing so till now. Also the fact that the government has not taken any action towards raising Rs 300 bn by selling stake in public sector companies makes it seem difficult for it to do so by the year end. All this is given the current volatile market conditions.
While finance ministry officials expect the fiscal deficit to remain higher, although closer to the 5.1% target, the same view is not shared by other economists. In fact they expect the deficit levels to rise above last year's deficit of 5.76% on account of overall growth rate slowing down coupled with the high crude prices. The finance ministry however expects the scenario to get better on the back of the government taking steps to improve its financial health. The FM however seems to have a game plan now. He has set up a panel to propose fiscal-consolidation measures. The reported submitted by this panel is being review by the government. Whether this will result in actual implementation remains to be seen.