The Herculean task of reaching the deficit target
The Herculean task of reaching the deficit target
The government is waking up to its smoke and mirrors budget arithmetic. Now, the finance ministry is considering additional taxes on cigarettes and diesel cars to help bridge the deficit. Govt plans to impose additional levies on cigarettes and diesel
While this proposal is still a gleam in finance ministry mandarins’ eyes, it is amply clear that the government would miss the 4.6% fiscal deficit target. Thanks to the unhindered growth in expenses, the government needs 3G-auctions kind of a windfall gains to reach the target.
The rest of the ₹ 6.58 trillion budgeted would be hardly enough for the government to cover its potential expenses. The biggest risk to government’s expenditure numbers comes from ballooning subsidies. Confident about fully de-regulating the fuel and fertilizer prices, the government has made a rosy projection of 12.54% drop in the current financial year’s subsidies to ₹ 1.43 trillion. But no reforms have materialized so far. Add to this the increasing food subsidy bill, the government’s total subsidy outgo is expected to exceed its projections by a considerable margin.
Rohini Malkani and Anushka Shah of Citigroup Global Markets said in a note: Our oil and gas analysts estimate that if crude averages $100/bbl during 2H, the government’s subsidy share could be ₹ 632 billion. Crude rising to $105/bbl could take the share higher to ₹ 681 billion……..Apart from fuel subsidies, another key area of concern could be a higher food subsidy bill. Over the last week, the government raised Minimum Support Prices of key rabi (winter) crops by 15-39%. This would put pressure on food subsidies, which at ₹ 606 billion for FY12, comprise over 40% of the total subsidy bill.
Meanwhile, the slowing economy has crimped revenue collection. In the first half of the current fiscal, the government was able to collect just 38.4% of the budgeted gross taxes. Both indirect taxes and collections on company profits have slumped. According to Morgan Stanley Research, the government received just 32% of the budgeted direct taxes on the company’s profits. On the direct taxes front, it was able to achieve 42% of the targeted revenues in the first six months.
And with economic activity in the domestic economy hitting a soft patch, in all likelihood, the tax revenues are not expected to witness any fillip in near future.
On a net-to-net basis, government needs to undertake more than the selective duty hikes to meet its deficit target. Like many others pundits, both the Morgan Stanley and Citigroup Global Markets economists expect the government to miss its full year deficit target. The only is question is by how much the deficit will slip?
Rohini Malkani and Anushka Shah of Citigroup notes: We expect the government to miss its deficit target due to both lower revenues and higher expenditures. Depending on the pay-out to oil companies, the headline deficit number could come in the 5.1% to 5.8% range v/s budget estimates of 4.6% of GDP.
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