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India's fiscal deficit could miss the revised official target and swell to as much as 5.6 percent of GDP, a top government official told Reuters on Thursday, making it tougher for the government to avoid a credit rating downgrade.
The comments were the gloomiest scenario for public finances yet given by the government and follow a failed auction of mobile phone spectrum last week that dashed its income forecasts.
Global rating agencies have threatened to downgrade India's sovereign credit rating to junk if it fails to rein in its deficit, which is ballooning because of higher spending on food, fuel and fertiliser subsidies and poor tax receipts.
Just last month, Finance Minister P. Chidambaram raised the fiscal deficit target to 5.3 percent of GDP for the current financial year to end-March 2013 from a previous target of 5.1 percent.
"Looking at the current trends in revenue and expenditure, 5.3 percent looks tough," said the official, who has direct knowledge of the government finances.
"There could be a shortfall of about 500 billion rupees in revenue receipts," the official said, explaining that would add 0.5 percentage points to the original 5.1 percent target.
A second official agreed with that assessment. Both officials declined to be identified citing the sensitive nature of the information.
In setting the revised 5.3 percent deficit target, the government was banking heavily on generating billions of dollars from the auction of second-generation (2G) mobile phone licences. But the auction last week yielded just under 25 percent of the targeted 400 billion rupees.
The government plans to have an auction of still-unsold telecom spectrum before March. But the first official said even with that auction, the government could at best garner only 200 billion rupees for the full fiscal year.
That could force the government to borrow an additional 400 billion rupees from the market, the official said, in the most negative borrowing scenario the government has yet given.
Private economists polled by Reuters earlier this month had estimated the government would need to borrow this amount, but only if the deficit hit 5.8 percent. Heavy government borrowing is seen as a drag on economic growth, because it drives up borrowing costs for private investors.
After the auction last week, Chidamabaram said he was still confident India could hit the 5.3 percent deficit target.
Bond yields rose on the Reuters report. The benchmark 10-year bond yield rose to as high as 8.23 percent, up 3 basis points from levels before the news. The yield was last trading at 8.22 percent compared to its 8.21 percent close on Wednesday.
New Delhi is on track to borrow 5.7 trillion rupees, or 5.6 percent of GDP, by February. Every 0.1 percentage point increase in the deficit is estimated to result in an additional market borrowing of at least 100 billion rupees.