Given indications that the government's deficit target for 2011-12 would be breached, the process of fiscal consolidation is likely to suffer a setback.
According to the Reserve Bank of India's second quarter Macroeconomic and Monetary Developments review, key deficit indicators widened during the April-August period of 2011-12, compared to the corresponding period of the previous year.
Wider fiscal imbalances during the year so far reflect a sharp deceleration in tax revenues, RBI said.
"Currently, government spending is adversely impacting the objective of containment of aggregate demand. On the current assessment, the government is unlikely to meet its deficit targets for 2011-12," RBI said.
It added given the growth outlook, there was a risk of not meeting the tax collection target.
"With oil prices remaining at elevated levels, the government's subsidy burden is expected to be much higher than budgeted.
"Hence, the process of fiscal consolidation is likely to suffer a setback. Fiscal slippage would further complicate the management of aggregate demand," RBI said.
Adding to the woes is the possibility of the government missing its disinvestment target, which would add to the pressures of achieving the budgeted fiscal deficit for 2011-12,
"The fiscal position during the course of the year would be shaped by the eventual growth outcome and its impact on tax revenues, as well as the government's commitment towards controlling expenditure, especially non-plan revenue expenditure.
Further, expenditure pressures from petroleum subsidies are yet to be fully accounted for in the central government finances, so far this year," RBI said.
During the April-August period, the compensation to oil marketing companies for under-recoveries registered year-on-year growth of 42 per cent, amounting to Rs 64,900 crore (Rs 649 billion).
As a result, against the budget estimate of 0.26 per cent of gross domestic product for 2011-12, the expenditure on petroleum subsidies could range between 0.74 per cent and 0.87 per cent of GDP, RBI said.
"The subdued growth in revenue receipts may pose a risk of spillover of the current year's petroleum subsidy burden to the next year," RBI said, adding there were further upside risks to gross fiscal deficit on account of revenue shortfall for the Centre of around 0.29 per cent of GDP, owing to the changes in the duty structure of petroleum products.
