The International Monetary Fund today said India's fiscal deficit is expected to increase to 8.5% of the GDP this financial year, mainly due to the downward revision in GDP growth, depreciation of rupee and higher global oil prices. This projection comes a day after the multilateral agency lowered its projection of India's growth rate to 3.75% in 2013.
In its October 2013 Fiscal Monitor Report, IMF said: "The deficit is expected to increase to 8.5% of GDP in FY2013-14, largely because of the downward revision in GDP growth, the rupee depreciation, and higher global oil prices." Finance Minister P Chidambaram while unveiling Budget 2013-14 proposals had said that government was targetting to bring down fiscal deficit to 4.8% of GDP this year.
The Budget for 2013-14 has projected a growth rate of 6.5 per cent for the current fiscal. "Although greater tax compliance and ongoing fuel subsidy reforms are expected to reduce the structural primary deficit, any major reform effort will likely be postponed until after the 2014 general elections," it said.
In India, gradual fiscal consolidation is needed to reduce fiscal vulnerabilities arising from high debt levels and to free fiscal space for social spending, the report said. In the report running into several pages, IMF said in some emerging market economies the slow pace of structural reform is dragging down potential output growth -— notably Brazil, India, and South Africa -- and weakening fiscal positions, particularly in cases in which debt levels are already high. "Indeed, a one percentage point decline in growth in emerging market economies would result in a 0.3% of GDP deterioration in their fiscal balances on average," the report said.
Contingent liabilities stemming from the banking sector, sometimes related to the expansion of public banks' balance sheets (eg: in Brazil and India), are rising in several emerging market economies that experienced buoyant credit growth in recent years.