New Delhi: India’s fiscal deficit rose to 1.8% of the gross domestic product (GDP) in the first quarter of 2011-12—almost thrice the level in the same period last year—reflecting fiscal slippage and raising serious doubts over the government’s ability to meet its year-end deficit targets with economic growth expected to slow further.
However, the finance ministry, buoyed by the impressive growth in tax revenue in the first quarter, maintained that it would be able to meet the year-end targets with the help of the rationalization of expenditure.
Analysts were, however, not convinced about the claims made in the quarterly review of the trends in receipts and expenditure for the first quarter (April-June) submitted to Parliament on Tuesday by the finance ministry.
The fiscal deficit number could range from 5.1% to 5.8% of GDP, depending on the timing of the payout to oil companies, Citi India economists Rohini Malkani and Anushka Shah said in an economic review.
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“Despite the announcement of austerity measures, we expect the government to miss its deficit target due to both lower revenues and higher expenditures,” they said.
According to the data released by the Controller General of Accounts, India’s April-July fiscal deficit came in at Rs2.3 trillion (55% of the budget estimates of Rs4.1 trillion) against 23.8% of the budget estimate during the same period a year ago. However, the finance ministry said comparisons were skewed in favour of last year due to the windfall gains from auctions of third-generation (3G) telecom spectrum during the first half of the year. India raised more than Rs67,000 crore from 3G auctions in April last year. It also blamed the frontloading of direct tax refunds this year as the reason of the significant slippage in deficit targets.
“As per trends in the first quarter, even after factoring (in) the impact of the changes in duty structure of petroleum products during the month of June 2011, indirect taxes are likely to achieve the budget estimate target, as the growth required for three major components of indirect taxes during the remaining three quarters of 2011-12 is only 11.7% over the corresponding period of 2010-11,” the finance ministry said.
The buoyancy in tax revenue may not be sustained as economic growth slows, analysts said. Credit rating agency Crisil Ltd’s chief economist D.K. Joshi said the government will not be able to meet its target on fiscal deficit, which may exceed 5% of GDP. “With economic growth slowing down, revenue collections will fall over the course of the year. At the same time, there are no signs of expenditure slowing down with fuel subsidies continuing (to grow),” he said.
Citi India said in its report that growth in gross tax revenue almost mimics the growth in industrial production and may slow with factory output moderating. During the first quarter of the current fiscal year, the Index of Industrial Production averaged 6.8% as against 9.6% during the same period a year ago.
“While gross tax collections during April-July were up nearly 10% (year-on-year) or 20% of budgeted estimates, accounting for devolvement to states, net tax revenues were almost flat, up 1.1% (year-on-year),” Malkani and Shah said. “Customs and excise duties, which have been trending above targets, could post moderation due to the cut in petroproduct duties in June. This impact is estimated at Rs490 billion, or 0.5% of GDP.”
While the government is trying to restrain expenditure by asking ministries to limit expenditure in non-priority areas, the first supplementary demand for grants for Rs34,700 crore, with Rs9,000 crore net cash outgo, was placed in the monsoon session of Parliament. However, the finance ministry argued that any additional expenditure will be met through savings in other components of expenditure.
The fiscal deficit as a percentage of GDP in the year to March 2012 may be anywhere between 5.05% and 5.12%, the Federation of Indian Chambers of Commerce and Industry said on 31 August.
Nominal GDP growth rate may slow as inflation moderates, thus affecting revenue buoyancy, said Samiran Chakraborty, head of India research at Standard Chartered Bank. Expenditure may bunch up later in the year as there is hardly any subsidy payment in the first quarter of the fiscal, he said.
“Disinvestment targets are also unlikely to be met due to weak market conditions,” Chakraborty said. The government is looking to raise Rs40,000 crore through disinvestment of public sector units during the current fiscal.
The government’s budget calculations could go awry due to rising food and commodity prices, analysts said. The finance ministry has factored in a 12.5% contraction in the subsidy bill for the current fiscal.
“We expect a higher subsidy outlay across the spectrum—fuel, food, and fertilizers. The main pressure point is that on fuel where, in assuming an average prices of $102 (Rs4,702 today) per barrel for the Indian basket, the government’s subsidy share could touch Rs505 billion, or 0.6% of GDP,” the Citi India report said.
The Reserve Bank of India said in its latest annual report that the lower fiscal deficit target for 2011-12 is “challenging” on account of sizeable upside risks to subsidies and downside risks to revenues from moderation in growth.
“The total fiscal slippage for the Centre from oil sector could thus be about 1% of GDP. In addition, there could be spillover in fertilizer subsidies,” it had said.
Graphic by Sandeep Bhatnagar/Mint