What is the likely scenario of deficits and debt in the coming months? The first important element in this story is that tax revenue collection depends on production and income in the economy. With exports and industrial production having shown a decline since the beginning of this year, and with the current gloomy trends in the world and domestic economy, it is likely that revenue growth will be low this year.

On the expenditure side, there is likely to be pressure to expand expenditure due to two factors. The first is counter-cyclical policy; that is, to provide a fiscal stimulus since the economy is witnessing a slowdown. The second reason for expansion would be large expenditure programmes. While expenditure on the on-budget fertiliser subsidy and the off-budget oil subsidy may be lower this year due to lower oil prices, the salary bill of the government will be higher due to the implementation of higher pay scales and the arrears that have to be paid this year, interest payments will be larger due to higher borrowing as well as the rise in yields on government securities. In addition, if there is expenditure on infrastructure as planned and an expansion of the NREGA, there is bound to be an impact on the deficit, leading to a higher debt-to-GDP ratio, which is already at 80 per cent of GDP. If adequate care is not taken, this could lead to a sudden change in confidence about the Indian government’s ability to pay back its debt.

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