Hit hard by slippages in direct tax collections and disinvestment proceeds and a higher subsidy burden, the Centre's fiscal deficit is estimated to widen to 5.9 per cent of GDP in the current financial year against the ambitious target of 4.6 per cent. For 2012-13, therefore, Finance Minister Pranab Mukherjee has chosen to be a little more realistic, targeting a deficit at 5.1 per cent of GDP.
Much of this reduction is predicated on anticipated higher revenues from increases in excise duty and service tax and a widening of the service tax net. This target, too, appears ambitious since it does not account for a higher subsidy burden if Parliament passes the food security Bill and global crude oil prices of over $115 a barrel.
To finance the fiscal deficit for 2012-13, the government will go in for gross market borrowings of Rs 5.70 lakh crore, which is 11.5 per cent higher than Rs 5.10 lakh crore estimated for this financial year.
However, it should be noted that market borrowings are slated to rise by over 22 per cent this fiscal against the original target of Rs 4.17 lakh crore. This was due to the lower amount of funds the government received from dwindling deposits in small savings schemes as high interest rates prompted depositors to go for other schemes.
Fully aware that it would not be possible for the Centre to meet the 13th Finance Commission's recommendations to eliminate the revenue deficit - the gap between revenue expenditure (subsidies, pensions, interest payments and so on) and revenue receipts (like tax revenues) - by 2013-14, the finance ministry in the last Budget had come out with a novel idea of segregating revenue deficit in two groups.
It said completely eliminating the revenue deficit would not be advisable as it also involves transfer of funds, which are used for assets generation, to states. Hence, it took out that portion from revenue deficit to come out with a category, called "effective revenue deficit." It now wants to eliminate this effective revenue deficit by 2014-15.
However, for this financial year, even the effective revenue deficit is pegged at 2.9 per cent of GDP now against budget estimates of 1.8 per cent. For the next financial year, this figure is estimated to come down to 1.8 per cent.