Budget 2012: Fiscal deficit at 5.1% of GDP, says Pranab Mukherjee

The fiscal deficit for 2011-12 was projected at Rs 4,13,000 crore, which was to be financed by market borrowings via the issue of dated securities estimated at Rs 3,43,000 crore (83% of deficit) and the issue of treasury bills estimated at Rs 15,000 crore (3.5% of the deficit).

The issue of securities against the NSSF (National Small Savings Fund) was estimated at Rs 24,000 crore (5.9% of the deficit).

The external debt of Rs 14,500 crore (3.5% of the deficit) and drawdown of cash balances of Rs 20,000 crore (4.8% of deficit) were the other two sources of financing.

DEFICIT WOES:

The government overshot its fiscal deficit projection of 4.6% of GDP for the current financial year by at least one percentage point, leading to higher-than-budgeted market borrowings.

It borrowed an extra Rs 92,800 crore by issuing dated securities and a further Rs 1,00,000 crore by issuing treasury bills to finance its fiscal deficit.

To put it simply, higher fiscal deficit meant issuance of dated securities jumped 22%, while treasury bill issuance soared six-fold over budgeted estimates.

All this forced the RBI to step in aiding the government borrowings by injecting liquidity into the system through the purchase of government bonds. The central bank has bought Rs 1,25,000 crore of government bonds through OMOs (open market operations) in the current financial year ending March.

The move helped absorb the shock of higher borrowings of the government, but a central bank stepping in to finance the fiscal deficit is inflationary in nature. The RBI has been consistently warning the government about its fiscal deficit, since it hampers the central bank's monetary policy operations.

The central bank is forced to keep monetary policy tight on the back of inflationary effects of a higher fiscal deficit and this tight policy is leading to a growth slowdown as firms cut investment spending on the back of high interest rates.

Higher government borrowings also crowds out the private sector, which is seen as more productive, from the loan market. Banks use most of their resources to buy government bonds leaving less money to lend to the private sector. That hikes the borrowing cost for the private sector.

Banks have bought Rs 1,67,000 crore of government bonds between April 2011 and February 2012, which is around 35% of their total deposits raised in the period.