The UPA Government is keen on reducing the fiscal deficit to 5.5 per cent in 2010-11 and further to 4.1 per cent in the subsequent year from 6.9 per cent in 2008-09 (actual). The Finance Ministry would seem to be in a hurry to secure additional funds through further withdrawal of benefits from the stimulus packages despite an improved ground situation.
Apart from a surge in non-tax revenues this year, with the auctions of 3G spectrum and broadband wireless access spectrum facilities fetching around Rs. 106,000 crore against the budget estimate of Rs. 35,000 crore, net revenues from indirect taxes too are likely to exceed budget estimates. While the new indirect levies will raise Rs. 46, 000 crore the increase in receipts from excise and customs duties and service tax will be Rs. 70,523 crore.
It was recently indicated that indirect tax revenues in April-May alone were higher by 49 per cent over the same period last year as against the budget estimate of 29 per cent for the whole year. The buoyancy is expected to continue in the coming months with expectations of a GDP growth of over 8.5 per cent.
If the agricultural sector puts up a heartening performance despite the recent erratic behaviour of the monsoon, the offtake of various duty paid items should remain brisk. As for net receipts from income tax, the budget projects a slight decline from last year's revised estimates. But with the vigorous drive to bring more people into the tax net there may even be a significant rise in net receipts. It has therefore been pointed out in money market circles that the government may be in a position to reduce its net borrowing though it may find it hard to get the maturing loans converted into new loans which afford higher yields than on earlier issues.
Drop in food inflation
The anxiety of the Government in this regard arises from fears of a spurt in food subsidies. The subsidy burden may remain heavy even with measures to raise Rs. 26,000 crore more through a hike in excise and import duties on crude and petro products. With no significant decline in food inflation in earlier weeks, the Agriculture Ministry has decided to increase the quantum of wheat supplied to people below the poverty line at Rs.3 a kg. At the same time, the allocation to State governments was increased by three million tonnes.
It is also stated that five million tonnes of wheat will be sold in the open market in the coming weeks at Rs.12.60 a kg. These moves will incidentally help the Food Corporation of India and other agencies in preventing a disturbing rise in buffer stocks. In any event, carrying charges and interest payments will be heavier than in 2009-10 especially as procurement of rice and wheat out of the kharif and rabi crops may exceed 60 million tonnes. These and other moves have already got reflected in a noticeable drop in food inflation to 12.92 per cent during the week ended June 19 from 16.90 per cent in the previous week.
However, it is feared that non-food inflation will be felt more acutely and the composite index may not be lower proportionately. Fears in this regard and expectations of a larger non-Plan expenditure under other heads are behind the efforts to raise resources as much as possible through different types of loans. The borrowing programme for 2010-11 will be challenging as there are maturing loans for as much as Rs. 70,680 crore, making a total gross borrowing of Rs. 460,000 crore.
The Finance Ministry has to gather substantial resources in nine months as even with a big effort to secure funds through dated securities and treasury bills, the funds obtained in April-June were Rs. 145,000 crore. With the Finance Ministry compelled to issue new loans at frequent intervals and diversion of resources from the money market as a result of successful bids for 3G spectrum and broadband wireless spectrum facilities, the monetary authorities have been adopting measures to improve liquidity in the money market.
Towards this end, maturing loans for about Rs. 49,200 crore will be purchased from holders in the coming weeks. This process will have to be continued for quite some time as corporate bonds are being issued by various institutions for large amounts and there will be unsatisfied demand for funds from industry and trade as well as the agricultural sector.
The uptrend in industrial output has been sustained so far and even in April the improvement was impressive at 17.6 per cent. The increase in exports too has been heartening as shipments were higher by 35 per cent in May.
As the volume and value of oil and non-oil imports also have risen the trade gap was higher at $11.3 billion. The uptrend in industrial output and exports may continue until October. But if a softening trend develops in subsequent months it will be due to a rising base in the same period in 2009-10.
With the decision to jack up prices for natural gas and lift controls on gasoline and even diesel later, along with higher prices for LPG and kerosene sold through fair price shops, the inflation rate may rise sharply in the coming weeks. As the minimum support prices for various agricultural products have been raised the composite inflation rate may not decline much in the immediate future. The Reserve Bank of India Governor, of course, hopes that the general inflation rate will drop to around 6.5 per cent by March next.
Since the different ministries too are fuelling inflation with their own decisions and imported inflation has its queering effect, it is emphasised that new measures will have to be adopted for curtailing demand and controlling money supply.
The recent streamlining of basic interest rates charged by banks is aimed at bringing about transparency when granting credit to various classes of borrowers. Even with a recognition that the inflationary situation is due to special factors the RBI Governor has decided to raise the repo and reverse repo rates by 25 basis points to 5.5 per cent and 4 per cent respectively. The inflows into the banking system have not been at the desired rate, especially as foreign exchange assets have not been increasing helpfully so far. Actualy, these have not risen sizably in April-June and it is being speculated whether there will be any improvement under this head in coming months. If it is understood that the inflationary pressures are on account of special factors there will be a ready disposition to aid the uptrend in industrial output and exports. Such an approach will enable the Centre to maintain the tempo of progress and raise the growth in GDP by 9 per cent in 2011-12 and by double digit figures in subsequent years.
