Fiscal consolidation at the centre has gone off track since FY08, with the deficit edging higher from 2.5% of GDP to 6.5% in FY10. In FY13, the government’s targeted a deficit of 5.1% is again likely to see slippage to the tune of 40bps.
State deficits too have edged up from 1.5% of GDP in FY08 to 2.9% of GDP in FY10. While the numbers for FY12 are not yet released, similar to the situation at the centre, these too could see a reversal due to lower growth impacting revenues
As a result of high deficits at the centre, the combined deficit has remained sticky in the 8-9% of GDP range. This has resulted in a near doubling of the borrowing requirements, putting pressure on yields.
In the near term, what is key is as the RBI says, "information on unpaid subsidies, loans extended against govt guarantees should be transparently reported by the State governments".
Another area of concern is rising SEB losses are taking a toll on banks and the power sector. Latest data indicates that 70% of SEB losses have been financed by PSU banks and 42% of these loans are backed by state guarantees.
When will the State and Central Governments move away from squandering Money for Populist Measures and do something worthy?
