Fiscal management: Inflation comes to Pranab's rescue

Harish Damodaran K. R. Srivats New Delhi | Updated on February 28, 2011

Union Finance Minister Mr Pranab Mukherji


The Finance Minister, Mr Pranab Mukherjee, can thank inflation, no less, for the Centre's better-than-budgeted deficit ratios during the current fiscal.

The 2010-11 Union Budget had originally estimated the fiscal deficit – the gap between the Centre's total spending and revenues, including non-debt capital receipts – at 5.5 per cent of gross domestic product (GDP) at current market prices.

The revenue deficit (non-capital revenue expenditures minus current revenues) and the primary deficit (fiscal deficit net of interest payments) were, likewise, budgeted at 4 per cent and 1.9 per cent, respectively.

Better numbers

But the revised estimates (RE), presented by Mr Mukherjee on Monday, show better numbers, with the fiscal deficit at 5.1 per cent and revenue deficit at 3.4 per cent. Only the primary deficit has overshot marginally to two per cent of GDP. All this, despite the fact that, in absolute terms, the RE figures for both fiscal deficit and primary deficit have gone beyond their budgeted levels.

How has the Finance Minister, then, managed to deliver an improved fiscal performance in relative-to-GDP terms? The reason has largely to do with inflation. While presenting his 2010-11 Budget, Mr Mukherjee had assumed GDP to grow nominally (at current market prices) by 12.5 per cent: 7.5 per cent ‘real' growth plus 5 per cent inflation.

However, the advance estimates released by the Central Statistics Office on February 11 placed the nominal GDP for 2010-11 at Rs 78,77,947 crore, representing a 20.3 per cent increase over the preceding fiscal.

The GDP at market prices was assessed to have grown by 9.7 per cent in real terms, with inflation adding another 10.6 per cent.

Denominator bonanza

The ‘denominator bonanza' conferred by inflation has meant that the fiscal deficit has ended up at only 5.1 per cent of GDP in the RE, against the budgeted 5.5 per cent. Had the GDP remained at the originally projected level, the fiscal deficit ratio would have been 5.8 per cent.

In other words, a gain of 70 basis points.

For the coming fiscal, Mr Mukherjee has budgeted the fiscal deficit to further decline to 4.6 per cent of GDP. This is based on a nominal GDP growth of 14 per cent, comprising 9 per cent real growth and inflation of 5 per cent.

If inflation turns out higher, he could reap the ‘denominator bonanza' all over again!

Published on February 28, 2011

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor