The Budget estimate of fiscal deficit for the next financial year has been underestimated by nearly 0.9 percentage point of Gross Domestic Product (GDP), or about Rs 51,000 crore.
This is because the estimates for revenue collections in the Interim Budget for 2009-10 do not reflect the full impact of the duty concessions announced by the government since December 2008.
The Budget estimate for fiscal deficit in 2009-10 put it at 5.5 per cent of GDP, compared with 6 per cent in the revised estimate for 2008-09.
In the first week of December 2008, the government had announced an across-the-board cut of 4 percentage point in excise duty, which was subsequently extended beyond March 31, 2009, by Finance Minister Pranab Mukherjee last week. The extension was undertaken after the presentation of the Interim Budget for 2009-10.
“The Budget numbers assume continuation of the excise duty cut only for the first half of the next fiscal,” said a finance ministry official. With the duty concession now expected to continue for the whole of the coming year, the government’s revenue loss on this count will double. The reduction of 4 percentage point in excise duty along with a cut in countervailing Customs duty was estimated to cause a revenue loss of around Rs 14,700 crore for the last four months of 2008-09. Thus, for six months, it would mean a revenue loss of Rs 22,050 crore, which is 0.4 per cent of GDP.
Further, the 2 percentage points reduction in excise duty and service tax announced last week will result in revenue losses of Rs 29,100 crore or 0.5 per cent of GDP. These two tax cuts will add 0.9 per cent to the 5.5 per cent fiscal deficit estimated in 2009-10.
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Already, Standard & Poor’s, a ratings agency, has downgraded the outlook for India’s sovereign rating because of high fiscal deficit and debt liabilities. In fiscal 2009, the Centre is projected to have a fiscal deficit of 7.8 per cent of GDP, including off-Budget items like oil and fertiliser bonds.
With the government saying it would spend an additional 0.5-1 per cent of GDP on Plan expenditure to boost economic demand if it returned to power after the coming general elections, the fiscal deficit is likely to widen even further.