The Reserve Bank of India (RBI) has sought the close monitoring of the twin deficits—the fiscal deficit and the current account deficits—as there are chances of these widening, following the slide of the global economy and its spillover to the domestic economy.
RBI said if the global economic crisis worsened, the government's revenue may dip, exports may decline and capital inflows may diminish, and this may hit fiscal consolidation and current account.
RBI's current assessment shows fiscal deficit in 2010-11 is likely to overshoot the budgeted projection. "If the global crisis deepens and the domestic economy slows beyond what is currently anticipated, the fiscal slippage could turn out to be an issue of concern. The resultant erosion in revenue could magnify the slippage," RBI said in its annual report released on Thursday.
The central bank said though the fiscal deficit ratio showed an improvement in 2010-11, a qualitative assessment of fiscal correction raises concern. "Not only did the correction in the revenue account reflect more-than-anticipated non-tax revenue from spectrum auctions, there has been a spillover of subsidy expenditure from the last quarter of 2010-11 to the current financial year," RBI said.
According to RBI Deputy Governor Subir Gokarn, if the economy slows more than what is expected (eight per cent to 8.5 per cent), the resultant revenue erosion could magnify the slippage. "At the same time ,the fiscal space to support any counter cyclical policy is limited. If there is a significant slowdown in growth, it is difficult to visualise significant responses in terms of fiscal expansion," he said.
The central bank has also projected widening of the current account deficit, since global uncertainties may lead to a dip in the demand for Indian exports. "Continuing robust exports in 2010-11 and 2011-12 so far faces downside risks," RBI said. It expressed concerns on the slowdown in the IT services sector, since it is intertwined with the global economy, with the US and Europe accounting for the bulk of Indian software exports.
The risk of capital flight due to global uncertainties in the coming months may also emerge, as foreign institutional investors withdraw capital from emerging economies. RBI said the current account deficit may widen, owing to more capital outflows, and borrowing by Indian companies may be expensive on due risk aversion by investors.
