Fiscal deficit funding plan goes awry

Rise in withdrawals from small savings throws government’s plans of funding fiscal deficit offtrack.

The path to fiscal discipline is fraught with problems. Even as investors are concerned about its ability to fund the fiscal deficit (the difference between revenues and expenditure), a half year down the line the government is not getting adequate support from funding sources. Typically, the government funds the deficit through government borrowings (dated securities or gilts), surplus cash and small savings collection. The government had initially planned to partially fund its fiscal deficit (budgeted at 4.6 per cent of GDP) via cash draw-down of Rs 20,000 crore and small savings collection of Rs 24,000 crore, explains Anubhuti Sahay and Nagraj Kulkarni of Standard Chartered Global Research.

These plans have come to naught, as small savings have seen a withdrawal of Rs 4,000 crore instead of fresh inflows. So, instead of a budgeted surplus of Rs 24,000 crore coming out of small savings, the government will have to payout Rs 4,000 crore to small investors, taking the gap in funding to Rs 28,000 crore. “The government has been able to manage a cash draw-down of only Rs 3,000 crore and small savings have witnessed an outflow of Rs 4,000 crore,” explains Sahay. Typically, when rates move up and people get better returns from commercial banks on term deposits, money from small savings move out. When rate cycles turn, this money comes back into small savings. However, the government did not anticipate this and, therefore, now has to increase its open market borrowing.

The government will now borrow Rs 52,800 crore in the second half of FY12 to meet this gap. Even with this new borrowing programme, the government is not factoring a further slippage in revenue collection. Economists believe the indirect taxes collection target looks challenging as of now. Also, the government’s divestment plans may be stuck. In the given circumstances, economists expect the government to miss its fiscal deficit target of 4.6 per cent. Standard Chartered expects the deficit to be at 5.4 per cent of GDP.

In addition to the slippage on fiscal deficit, the government will also crowd out private borrowers from the market by borrowing far more than budgeted. Ajay Parmar, head of research at Emkay Global, says: “Historically, the borrowing programme has been front-ended, as credit growth remains lower in H1 and gradually picks up in H2, owing to the festive season and capex plans by corporates. With borrowing being higher at 47 per cent of FY12 in H2 and liquidity being in deficit of Rs 50,000 crore, we believe there could be some crowding out of private borrowings.”