RBI expects centre-states deficit to reach 10 per cent of GDP this fiscal

The combined fiscal deficit of the centre and the states may rise to 10 per cent of GDP from 6 per cent in the current fiscal ending 31 March 2009,  RBI governor D Subbarao said today.

With a further fall in investment demand this year, the year's total fiscal deficit could reach 10 per cent against the projected 6.0 per cent, the RBI governor said today.

The RBI had projected the central government fiscal deficit to rise to 6 per cent of gross domestic product in fiscal 2008-09 from a previous target of 2.5 per cent.

''This year, 2008-09, the expectation is that the combined fiscal deficit of the centre and states is going to be as much as 10 per cent. So that is a concern," he said.

"The plain fact is that activity is slowing down'', he told a conference in Tokyo. ''Growth moderation, we believe, will be steeper than earlier suspected," he added.

The government, meanwhile, has projected higher spending in fiscal 2009-10 to shield the economy from a global slump. This would then pump up deficit further, he pointed out.

The RBI governor, however, said the economy will jump-start and it comes, recovery will be "sharper and faster" than other economies.

The RBI had forecast a growth rate of 7.0 per cent in the current fiscal. But, with industrial output in the country down 2.0 per cent in December from a year earlier, the RBI has already revised down its growth expectation for this fiscal year and slashed its key lending rate by 350 basis points since October to 5.5 per cent.

Yet, Subbarao said, there were positive features like a decline in inflation which would support consumption demand, reduce input costs for companies and give the government more fiscal room.