The general government fiscal deficit will rise from 6.2% of GDP in FY08 to 10.2% of GDP in FY09 and forecast it to remain high at 10% of GDP in FY10. Both the state and central deficits are likely to increase as revenues slump due to the slowdown in economic growth. Tax revenues fell 19% yoy in December 2008 compared to a rise of 34% yoy in December 2007.
Expenses on the other hand, are likely to remain elevated in FY10, given that many of the expenditure commitments of FY09 such as the Sixth Pay Commission pay hike arrears, farm loan waiver and the National Rural Employment Guarantee program will spill over into FY10.
The government has already overshot its borrowing plan this year by US$25 billion to a total of US$47 billion. Net borrowings forecast for FY10 to be even higher at US$55 billion due to the central government’s deficit remaining high. This is likely to steepen the yield curve. Also note that, Money supply growth continued to fall as growth in private-sector lending and net FX assets of the banking sector declined. Inflation continued its downward march.