Centre looks to cap fiscal deficit at 6.7%
NEW DELHI/MUMBAI: The government will not be able to cut its budget deficit this fiscal year as previously projected, officials said, but will seek to cap the shortfall at last year’s level to prevent a major deterioration in public finances.
Efforts to maintain some fiscal discipline reflect New Delhi’s concern around risks to its sovereign credit rating but will likely limit the government’s firepower to contain inflation and provide relief to households and businesses.
In February, Prime Minister Narendra Modi’s government set a fiscal deficit target of 6.4% of gross domestic output (GDP) for the year that started on April 1, compared with a deficit of 6.7% last year. The sources said while increased spending to provide relief from inflation meant the government would miss this year’s target, policymakers would seek to limit the deviation to 30 basis points.
“We will try to contain the slippage to last year’s levels,” one of the officials, who declined to be identified, told Reuters.
Surging costs forced India in May to cut fuel taxes and change duty structures, hitting revenues by about $19.16 billion, while additional fertiliser subsidies lifted expenditure. The government and central bank have scrambled to contain prices through fiscal measures and monetary tightening after inflation jumped to multi-year highs.
Retail inflation has held above the Reserve Bank of India’s 6% mandated ceiling for five straight months while wholesale price inflation has risen to 30-year highs.
The government is wary of the risks fiscal slippage poses to its sovereign credit ratings. Its debt to GDP ratio, which stands at around 95%, is significantly higher than the 60-70% levels for other, similarly rated economies.
That leaves the government with little room to provide additional relief, as the May measures are already expected to drive up the deficit by more than 30 basis points if revenue collection does not exceed the budget target. “The government can definitely do more but at what cost? If more steps are taken, it will require additional market borrowing and that will drive up yields and eventually cause higher inflation,” said a second source who is aware of the talks.
The government is reluctant to expand its record market programme of ₹14.31 lakh crore this fiscal year, both officials said, adding that a decision on an additional borrowing requirement would only be taken in November.
The benchmark 10-year bond yield rose 1 basis point to touch the day’s high of 7.44% following the report, extending its gain to 4bps on the day. The finance ministry did not respond to requests for comment.