The Centre's fiscal deficit touched 6.7 per cent of gross domestic product (GDP) in the first half of 2011-12 itself.
With not much hope on robust tax collections and disinvestment, economists peg the gap between the government's expenditure and receipts to be between six and seven per cent for this financial year.
If this happens, the fiscal deficit will reach the 2009-10 level, when stimulus was not even partly withdrawn. This time, the level will be reached despite the government not giving any stimulus to the slowing economy.
But then, on the tax front, much of the stimulus stays, as the government has raised the excise duty by two percentage points, from the six percentage point cut it gave to boost the economy at the time of the global financial crisis.
The two percentage point cut in service tax is there. But expenditure growth has seen a decline from the times of meltdown.
Even the Reserve Bank of India has raised doubts on the government's fiscal deficit target of 4.6 per cent. Fiscal deficit has already touched 74.4 per cent of the BE for 2011-12 in the first seven months. Data for November will be out this week.
"The fiscal deficit will touch seven per cent of GDP in 2011-12. With high oil prices, rupee depreciation and lower collections, the deficit will go out of control," said Siddharth Shankar, director, KASSA.
Arun Singh, senior economist at Dun & Bradstreet, said the deficit would certainly not be 4.6 per cent, but the second half would be better than the first, with tax collections going up. "Advance tax collections come up in the second half, and the government has no room to spend now," he said.
Singh pegged the deficit at close to six per cent. He said there was always a shortfall in planned expenditure, carried forward to the next year, which would help containing the fiscal deficit this year, as well.
Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry, said with some disinvestment possibility arising, the second half would surely be better than the April-September period.
"The overall fiscal deficit will be six per cent of GDP or below," he said.
At six per cent, the fiscal deficit will be at the 2009-10 level, when stimulus existed for the slowing industry.
However, it would be much less than the 8.2 per cent witnessed in 2008-09, when India saw the impact of the global financial crisis after the collapse of Lehman Brothers.
Madan Sabnavis, chief economist, CARE Ratings, projected the deficit at 5.5 per cent, but with an upward bias. He maintained the government needed to follow the Keynesian model and spend to boost growth rather than worrying much about the fiscal deficit.
"Due to the overall slowdown in the economy, the private sector is not spending. So, the only entity that can do investment is government, as it is able to borrow at 8-8.5 per cent."
Sabnavis said other countries were running much higher deficits, and with India being a developing country, the government needed to spend.
The government's recent action of floating a vehicle to pledge shares owned by Specified Undertaking of the Unit Trust of India (SUUTI) has not impressed many in terms of meeting the divestment target of Rs 40,000 crore (Rs 400 billion).
Analysts feel SUUTI would only enable the government to meet half of its disinvestment target. In the first seven months, the government achieved disinvestment of just over Rs 1,100 crore (Rs 11 billion).
Against this background, economists have questioned the rationale behind ratings agency Moody's recent decision to upgrade sovereign long-term local currency debt from junk to investment, or from Ba1 to Baa3.
As the GDP growth is slowing, it would be difficult for the government to meet the tax revenue target. Finance ministry officials admitted there was likely to be a shortfall of Rs 40,000 crore (Rs 400 billion) in tax receipts, compared to the Budget estimates (BE).
In the first eight months, total tax collections reached 52.4 per cent, or Rs 487,877 crore (Rs 4,878.77 billion), of the BE of Rs 930,467 crore (Rs 9,304.67 billion). However, lower GDP also means that less absolute amount of fiscal deficit is needed to make it to a particular percentage of GDP.
Also, with the rupee depreciating by 20 per cent against the dollar in four months, subsidies on oil imports are putting further pressure on the government's expenditure.
In the first eight months, the government was able to rein in its expenditure as planned. It spent Rs 6.80 lakh crore, or 54 per cent, of the BE of Rs 12.58 lakh crore for 2011-12. Going ahead, the expenditure story may not turn out to be rosy, as the government has gone for two supplementaries, aggregating Rs 76,000 crore (Rs 760 billion) for oil, fertiliser and other subsidies.
According to International Monetary Fund data, India's fiscal position is much better than other countries. The US and the UK had fiscal deficit of 10.3 per cent of GDP in 2010, while for France and Japan, it was 7.1 and 7.4 per cent, respectively.