The Centre will use taxpayer’s money to finance the Rs 60,314 crore farm-loan waiver plan.
FM says 50 bps fiscal deficit headroom gives the fund latitude
But analysts say Sixth Pay Commission, fertiliser subsidy, food inflation will upend the fisc goal
MUMBAI: No bonds, no divestments. Terms strictly cash please.
The Centre will use taxpayer’s money to finance the Rs 60,314 crore farm-loan waiver plan.
The buoyancy in tax collections and expenditure restructuring will make this possible, said finance minister P Chidambaram, replying to a debate in the Parliament on Friday.
But what if taxes aren’t enough?
The government will then dip into other sources such as dividends, interest and royalties. “Only as a last resort will the government borrow from the market,” Chidambaram said.
The package will be drawn up in consultation with the Reserve Bank of India, the National Bank for Agriculture and Rural Development and lenders so that the exact debt assessment process is completed by June 30.
The plan is to pay the cash to banks (majority of which will be cooperative and regional rural banks) in 36 months starting July 2008 and June 2011, with Rs 25,000 crore being paid in July 2008; Rs 15,000 crore between April 1, 2009 and March 31, 2010; Rs 12,000 crore in the year starting April 1, 2010; and, Rs 8,000 crore in the year starting April, 2011.
The burden in any single year would not be more than 0.25% of gross domestic product.
Chidambaram said the fiscal deficit will fall to 2.5% of GDP in the next financial year from an estimated 3.1% due to tax buoyancy, and “this 50 basis points headroom” gives the government great latitude to do a lot of things.
Indranil Sen Gupta, chief economist, DSP Merrill Lynch, said the fiscal deficit target for FY09 is unlikely to be met considering the burden of Sixth Pay Commission recommendations coming up.
Government employees are expected to get salary hikes that could cost the exchequer in excess of Rs 50,000 crore.
“So we may end up over 3% fiscal deficit next year,” Sen Gupta said.
But, he said, by spreading the payment of the loan waiver over three years the finance minister has ensured that there is less pressure on the system.
Sonal Varma, Indian economist at Lehman Brothers concurs, adding slowing growth and increased subsidy for oil, fertiliser and food inflation are also risks to the fiscal deficit number.
Samiran Chakraborty, chief economist at ICICI Bank points out that though the finance minister had set himself an aggressive target of 2.5% fiscal deficit in 2009, the initial target was 30 bps lower at 2.8% fiscal deficit.
“What the farm loan waiver means is that the 2.5% target may not be met, but this in itself is not a threat to the initial target of 2.8% deficit. There is still clarity to emerge on Pay Commission, fertiliser subsidy and so on. Such extra provisions will definitely eat into the FRBM target,” Chakraborty agreed.
The finance minister also ensured the votebank is well-looked after. Once the debt is waived, farmers who will benefit from the debt waiver and debt relief will become eligible for fresh credit immediately thereafter, Chidambaram said.
In all this, public sector banks may have been saved, too.
“This is good news from the point of view of the banks as it will help them clear their books and clears uncertainty,” said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd.
- With agencies.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}