Putting the pieces together

As a part of its first stimulus injection,the government had in financial year 2008 injected more than Rs 1,86,000 crore into the economy,pulling its total expenditure up by 22 per cent compared with the previous fiscal. The government loosened its purse strings a little more in the subsequent financial years. This resulted in the burgeoning total expenditure growing at 24 per cent in financial year 2009,up at more than Rs 10 lakh crore. However,according to the budgetary estimates,the growth rate of expenditure is now likely to decelerate. Finance minister Pranab Mukherjee expects a total expenditure of Rs 11,08,749 crore in the next fiscal. This translates into a growth rate of 8.6 per cent almost a third of what it was at the peak of the financial crisis.

The government is not just reining in its expenditure,but is also initiating steps to increase its revenue. After witnessing a negative growth rate of 0.30 per cent in revenue in financial year 2009,revenue receipts are now gaining pace and are expected to grow at a whopping 18 per cent,compared with the previous year. During the current financial year,revenue receipts grew by 6.86 per cent.

The government expects to collect revenue receipts of Rs 6,82,212 crore in financial year 2010-11 compared with Rs 5,77,294 crore collected in the current fiscal.

Robust growth in revenue will help the government bring gross fiscal deficit down by over a percentage point by the end of the next fiscal. According to budgetary expectations,gross fiscal deficit is likely to come down to 5.5 per cent of GDP by the end of next fiscal,after looming at over 6 per cent during financial years 2009 and 2010.

A gradual decrease in fiscal deficit also aligns fears of crowding out of private sector. High net borrowings by the government usually results in high interest rates and,in turn,leaves no space for the private sector. According to the finance ministers estimates,the governments net borrowing is expected to be around Rs 3,45,010 crore a drop of more than 13 per cent compared with last year. It is for the first time in the last five years that the governments net borrowing will witness negative growth.

Between financial years 2006 and 2008,fiscal deficit dropped every year. It stood at 4 per cent of the GDP in financial year 2006 and 3.3 per cent in the next financial year. It was only after the financial crisis that fiscal deficit started rising and clocked a growth of 6.7 per cent in the current financial year.

By ensuring more space for the private sector,the government intends to incentivise India Inc to raise more funds for investment in projects that were put on the backburner over the last couple of years and also initiate new plans. After registering negative growth of 2.4 per cent in financial year 2009,gross domestic capital formation is now expected to grow at more than 15 per cent compared with the last financial year.

All these factors put together certainly point towards a GDP growth rate of 8 per cent by the end of this fiscal and possibly double-digit growth in next couple of years. The Economic Survey,released on Thursday,and the finance minister expect India to return to the path of high growth rate and emerge as the fastest growing economy in next few years.

But a strong recovery and high growth is likely to be accompanied by high inflation. Supply-side constraints and high demand have already stoked food price inflation to almost 18 per cent. The headline inflation,on the other hand,has breached 8.5 per cent mark annual target set by RBI. And now with the fuel price hike,inflation is likely to be in double digits by the end of this fiscal. The rise of Re 1 on the central excise duty on petrol will effectively mean a rise of more than Rs 2 in the price of petrol adding almost 41 basis points to the inflation.