India's GDP deficit can be below 5 percent

• Global investors have expressed worries about India's high inflation, wide current account deficit and rising corruption. But India's fiscal performance this year has been a big positive surprise. The April-December data have revealed a fiscal deficit that is just 44.8% of the corresponding figure last year. 
• Against the budgeted 5.5% of GDP, the actual fiscal deficit may well fall well below 5.0% in 2010-11 , thanks to the remarkable rise in nominal GDP and unanticipated rise in government receipts, both tax and non-tax . 
• The fiscal deficit level could dip further, to something close to 4% next year. So flush with funds is the government that it has drained bank liquidity, and so the RBI has been put in the embarrassing position of having to inject ever more liquidity into financial markets even as it tries to curb inflation. After telecom spectrum sales fetched a whopping . 1,05,000 crore, the resultant high government balances with the RBI were thought to be a temporary blip, which would be reversed as the government spent its windfall. But booming tax revenues have meant that, despite additional demands for grants and higher oil under-recoveries , the government's coffers remain pretty full. The primary deficit — the fiscal deficit less interest payments — has dropped to 0.3% of GDP. 
• The spectrum bonanza took government non-tax revenue in April-December to 130% of the annual budgeted sum. But tax revenue boomed, too: it was up 27% against the budgeted 17.9%. In April-December , Plan spending and revenue spending were 67% and 73.1%, respectively , of the annual budgeted amount, while revenue was 85.6% of the target. This suggests that spending is more or less on track, while revenue has vastly exceeded expectations . 
• This may herald a structural shift to a higher tax/ GDP ratio, which may cross 12% of GDP this year and set a new record. This augurs well for the future. No doubt, there remain fiscal dangers like a huge rise in oil prices, and financial panic if the march to democracy in the Arab world turns chaotic in the short run. Indian populist measures have the potential to swallow up the revenue boom. Nevertheless, India is currently in a sweet fiscal spot. The lesson is that rapid growth can mitigate, if not cure, a thousand ills. The point is to sustain that growth.