The euphoria over the interim budget is over. Stand-in finance minister Pranab Mukherjee has presented a true 'vote on account' indicating that the Govt. and the Economy have gone into a sleep mode. The Govt. has admitted the grim realities facing the economy.
It is a bad omen for the economy as the revised fiscal deficit is projected to touch 6% of the GDP, against the budgetary deficit of 2.5%. If we include the off budget items like subsidies and oil bonds the figure could be as high as 7.5% of GDP. This offers enough ammunition to the rating agencies to downgrade India's sovereign rating which will raise the cost of borrowing in international markets. Govt. finances will be put under severe strain as the tax revenue is growing at a much slower pace.
To undertake the ongoing development programmes the Govt. will have to resort to massive borrowing of around Rs.45,000 crores, which is likely to put strain on the interest rates. Although inflation rate of 4% offers RBI a scope to lower rates, this may be put on hold in view of the Government's borrowing programme.
A high fiscal deficit leads to a multiplicity of problems in the long run. With a slowing economy tax receipts are likely to shrink further, whereas there is little scope for controlling Govt. expenditure. High Govt. borrowing results in reduced availability of funds for the private sector. A high fiscal deficit also leads to a high current account deficit, which leads to weakening of the currency. The foreign capital becomes dearer which is detrimental to the growth of the economy. Indian economy is in for really tough times ahead.
1 comment:
I think in view of the economic slowdown it is the dity of the govt. to step up spending, so a high fiscal deficit is quite justified in such extra ordinary situations.
Post a Comment