Increasing deficit may be a bad news at a time when economy is going sluggish and growth is set to shrink by at least two percentage points
In what depicts the worsening condition of government finances in one of most painful years for global economy, India’s fiscal deficit in first eight month (Apr-Nov) period of FY09 has reached 132% of budgeted deficit. The figure compares poorly with last fiscal’s performance when deficit over the same period was only 63.8%.
The culprit is 21% jump in expenditure in the month of November coupled with a poor growth of 8% in revenue. So far during the fiscal the government has been forced to spend higher on oil and fertiliser subsidies owing to unprecedented rally in commodity prices across the board.
However, the increasing deficit may not be a bad news at a time when economy is going sluggish and growth is set to shrink by at least two percentage points. An expansionary fiscal policy or more expenditure than income will have a positive impact on growth and act as a support on the downside of growth.
While the deficit is set to increase through rest of the fiscal as government spends more to provide stimulus to the economy as well as revenue goes down with declining production coupled with tax concessions, the increase, if judiciously directed, will have positive impact on economy, especially in light of declining inflation and deflationary phase ahead in sight around second quarter of next fiscal.