Monday, February 3, 2014

Will India Bust its Budget?

India’s December 2013 fiscal deficit narrowed by over 85% on-month, but the data offered little comfort to the overall fiscal metrics. Closing in on the annual target, the fiscal deficit for April to December touched 5.2
trillion rupees, according to data release last Friday. This accounts for 95% of the full fiscal year target with a quarter still to go, up markedly from near 80% at the same time last year. Tax revenues reached 58% of the annual goal, while expenditure outran at 70% led by higher non-plan spending. To set the trend right, the monthly deficit in the March 2014 quarter needs to be cut back to 87 billion rupees to meet the annual target, down significantly from the 573 billion rupees in the first nine months.

With only a quarter to go for this fiscal year and general elections draw­ing closer, it is becoming increasingly tenuous to meet the deficit target of 4.8% of GDP. Despite the risks, the government remains optimistic that the goal will not be breached.

A leading economic daily had speculated that a 20% cut in the planned expenditure outlay in the 2013/14 fiscal year was in the works. The rule that the ministries should spend only a third of their allotment for the March quarter might also be enforced. On the revenues end, higher dividend payouts are be­ing sought from public sector companies, along with pushing the divestment process, to provide some relief to collections. Nonetheless, the bulk of the correction to meet the fiscal deficit target will stem from expenditure restraint. Reduction in spending will be negative for the growth outlook, with our estimate at 4.8% for the 2013/14 fiscal year, before inching up to 5.3% in the 2014/15 fiscal year. Rating agen­cies meanwhile have given the government the benefit of the doubt and shifted focus to the post-election growth performance.

In the meantime, as part the revision of past GDP numbers, the statistics agency revised up 2011/12’s to 6.7% from 6.2% earlier and 2012/13’s down to 4.5% from 5% earlier. The source of the slowdown was broad-based as agri­culture/ forestry/ fish­ing output had risen by 1.0% (versus the previous estimate of 1.6%). Manufactur­ing activity was revised down notably to 1.2% (from 2.3% earlier) and service sectors up 7% (versus 7.1% previously). The advance estimate for the 2013/14 fiscal year is due for re­lease on February 7.