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Business News/ Market / Mark-to-market/  Fiscal compression likely to affect growth further in current quarter
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Fiscal compression likely to affect growth further in current quarter

The government will have to cut spending by 0.6% of GDP over the next four months to meet its deficit target

Industrial production growth in April-November this fiscal has declined 0.2%, as against a growth of 0.9% during the same period last fiscal. Photo: BloombergPremium
Industrial production growth in April-November this fiscal has declined 0.2%, as against a growth of 0.9% during the same period last fiscal. Photo: Bloomberg

Despite a favourable base effect, industrial production (IIP) in November 2013 contracted by 2.1% from a year ago, and the manufacturing sector contracted by 3.5%. With overall consumer goods production contracting by 8.7%, Madan Sabnavis of CARE Ratings points out that “the expected revival of rural and festival demand has not worked out". And with political uncertainty looming large over the horizon, there isn’t much hope of any revival in investment demand for the rest of the year. Industrial production (IIP) growth in April-November this fiscal has declined 0.2%, as against a growth of 0.9% during the same period last fiscal. Sabnavis points out that “For 1% growth for the year, IIP has to increase by an average of 3.2% in the next four months".

That could be a tall order, particularly because, with its finances stretched and given the need to contain the fiscal deficit, the growth in government spending could slow to 5.6% year-on-year (y-o-y) in the last four months of the current fiscal from around 18% between April to November, as Nomura Research contends. That is an additional factor likely to weigh on growth, which is already very fragile.

The government embarked on a drive to fix the fiscal situation by announcing the sale of a 13% stake held by the specified undertaking of the Unit Trust of India in Axis Bank Ltd and seeking a record dividend from Coal India Ltd which will help raise around 22,000 crore. But all this divestment and higher dividend may not be enough to bridge the fiscal gap which has reached 94% of the budgeted target between April to November.

Overall revenue may still fall short by 72,000 crore, or 0.6% of gross domestic product (GDP), in FY14 due to sluggish growth causing net tax revenue to grow at only 10% y-o-y in FY14 against the government’s target of 19%, according to Nomura’s estimates. They say the government will have no choice but to cut spending by 0.6% of GDP over the next four months to meet its deficit target, which could drag GDP growth down by 30 basis points. One basis point is one-hundredth of a percentage point.

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Published: 13 Jan 2014, 12:31 AM IST
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