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Deficit devil on a rampage

New Delhi, Feb. 16: The fiscal deficit for this fiscal has grossly overshot the target, sparking fears of a ratings downgrade and an adverse impact on private investment.

In his interim budget speech, stand-in finance minister Pranab Mukherjee said the deficit for 2008-09 would be 6 per cent of the GDP against the target of 2.5 per cent. In hard numbers, the deficit will be Rs 3,26,515 crore against the target of Rs 1,33,287 crore.

For 2009-10, the deficit target is still higher, at Rs 3,32,835 crore, or 5.5 per cent of the GDP. Interest payments in this fiscal are a massive Rs 1,92,694 crore, which are 41 per cent of taxes, while for the next fiscal they will be at 45 per cent.

“Expenditure may have to be increased substantially if we are to give the economy the stimulus it needs to cope with the global recession,” Mukherjee said.

Increased subsidies, a farm loan waiver, pay hikes for civil servants and tax sops to revive industry have led to a steep rise in government borrowings. As the economic slowdown is likely to continue in 2009, it will be a daunting task for the government to check the deficits.

Economist John Maynard Keynes believed fiscal deficits helped countries to climb out of economic recession. However, many say that when government raises large sums, interest rates rise and inflation jumps as private investors get muscled out.

Indian companies are worried about high borrowings. “Interest rates could harden in the long run. However, short-term interest rates would remain soft,” said Uday Kotak, vice-chairman, Kotak Mahindra Bank.

With less than two months to go for the end of this fiscal, the government will be raising Rs 46,000 crore over and above its initial target.

Moreover, if the government falls short of tax targets, it will put additional pressure on borrowings.

“In case of any further fall in indirect and direct revenue collections by the government, I expect the combined fiscal deficit at around 9 per cent by the end of March 2010,” said Saurabh Nanavati, CEO, Religare AMC.

Analysts are also not ruling out a downgrade by the rating agencies. Standard and Poor’s is planning a review of the country’s domestic debt rating, following today’s announcement of the high deficits.

However, Prime Minister Manmohan Singh’s government says spending to revive the economy is more important now than worrying about the deficit.

Over the last one year, since the presentation of P.C. Chidambaram’s budget, the economy is on a roller coaster.

First, commodity and crude prices skyrocketed, pushing inflation to nearly 13 per cent in August. The RBI ratcheted up the policy rates to check prices.

However, the global financial crisis arrived in September, leading to a fall in prices but bringing with it a recession in the rich countries and a slowdown in India.

As policy-makers scurried to revive growth, interest rates were reduced and government expenditure shot up.

In addition, the government had to borrow heavily to pay for the food, fertiliser and oil subsidies. The farm loan waiver and the pay recommendations made matters worse.

World Bank funds

The government will move the World Bank for $4.2 billion to boost the capital of PSU banks and improve their capital adequacy ratios (CARs).

“We will recapitalise four banks this fiscal — Uco, Central Bank of India, Vijaya Bank and United Bank of India,” said finance secretary Arun Ramanathan.

Part of the funds would go to banks while the rest were for Power Grid Corporation and India Infrastructure Finance Company Limited.

Higher capital will push CAR of banks to over 12 per cent, higher than the mandatory global norm of 9 per cent.

“We are trying to push CAR of all banks to 12 per cent. At the moment, we don’t have any bank with CAR lower than 10 per cent,” said Ramanathan.

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