The Government’s budget deficit for fiscal 2011-12 will be around 5 per cent of GDP, rather than the 4.6 per cent projected by the Budget, as revenue growth will decelerate over the rest of the year and expenditure growth will prove hard to curb, according to Moody’s Investors Service.
The credit rating agency warned that in the second half of the fiscal, indirect as well as direct tax collections are likely to suffer from a moderation in economic activity; global uncertainties will slow trade activity and high domestic interest rates will likely curtail corporate profitability.
The current buoyancy in gross tax collections reflects still-high nominal GDP growth as well as strong trade performance in the first half of the fiscal year, it said in a statement. On the expenditure side, Moody’s assessed that relatively high global oil prices and rupee depreciation will cause the Government’s oil subsidy to surpass initial estimates. Interest payments, which account for over 20 per cent of total government expenditure, may also exceed Budget projections.
Further, unfavourable equity market environment will impede the Government’s plan to earn Rs 40,000 crore from disinvestment in state enterprises and use it to finance the deficit. Referring to the fact that the Government will be borrowing Rs 2.20 lakh crore, which is about 30 per cent more than market expectations, in the remaining six months of fiscal 2011-12, the agency said this development is credit negative as increased issuance will raise Government borrowing costs in the near term.
In combination with a likely widening of the Budget deficit over the course of the year, it suggests a slower path to fiscal consolidation, said Ms Atsi Sheth, Vice-President, Sovereign Risk Group, Moody's.
The Government has already issued Rs 2.5 lakh crore in bonds this year, so market borrowing by the Central Government for fiscal 2011-12 will total Rs 4.7 lakh crore against the Rs 4.17 lakh crore projected by the Budget in February.
Increased government bond issuance announced last week will ultimately lead to increased overall Government debt outstanding, rather than simply a shift in debt composition, that is, Small Scale Savings scheme providing less and bonds contributing more in budgetary financing, Moody’s said.