Home / Politics / Policy /  Meeting fiscal deficit target a challenge, says govt

New Delhi: Staying within the fiscal deficit target in the year ending 31 March will be a challenge, and a pick-up in economic activity in the second half is key to meeting budgeted revenue targets, the government said in its mid-year economic analysis released on Thursday.

In the report tabled in Parliament, the government said that below par indirect tax collections, potentially higher subsidy requirements, and uncertainty on account of divestment receipts will make it difficult to meet the fiscal deficit target of 4.8% of gross domestic product (GDP).

To be sure, the government’s comments are based on the revenue and expenditure trends in the first half of the current fiscal year.

In 2012-13, the government had managed to limit the fiscal deficit to 4.9% of GDP, thanks mainly to large-scale compression of plan expenditure. In the current fiscal year too, the government has already cut budget allocations of various central ministries and announced a 10% cut in non-plan expenditure.

Weak growth in revenue collection, mainly due to the slowdown in economic growth, has exerted pressure on government finances although finance minister P. Chidambaram has repeatedly asserted that the government will not breach the “red line" on the fiscal shortfall.

India’s economy is expected to grow 4.9% in the current fiscal year, higher than the revised 4.5% growth in the last year, according to data released by the Central Statistics Office.

In the first nine months of this accounting year, the fiscal deficit widened to 95.2% of the budgeted target, up from 78.8% in the corresponding year-ago period. While the government utilized 63.3% of the plan expenditure target by December, compared with 56.8% of the target in the year-earlier period, tax revenues were only at 58.6% of the target, as against 62.8% last year.

The United Nations World Economic Situation and Prospects 2014 (WESP) report released in January also raised doubts about the government’s ability to meet its 4.8% fiscal deficit target.

“Given the weak growth momentum in the region and the difficulties of raising tax revenues and curbing expenditure growth, fiscal deficit will remain substantial in the near term. In India, the government is unlikely to meet its target since the growth is below projections and the depreciation of rupee pushes up the subsidy bill," the WESP report said.

At a South Asia media launch on Thursday, UN economist Nagesh Kumar said the upcoming general election and related populist expenditure posed a challenge in meeting the target.

Not all experts say the target is out of reach.

“I am slightly more optimistic about the government achieving its target since it has just received more than it expected from the spectrum auction and received huge dividends from public sector enterprises," said N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy (NIPFP). “There has also been a hesitation to increase allocations to plan schemes, which may not be a bad thing since many are sitting on unspent balances."

However, the quality of expenditure curbed definitely matters and how the sub-indicators of revenue deficit and primary deficit move also needs to be looked at, Bhanumurthy said.

An NIPFP study has found that changes in capital expenditure have a stronger impact on growth than changes in revenue expenditure.

Standard Chartered Plc. said in a report that non-tax revenues, including disinvestment proceeds, could surprise on the upside as dividend flows from state-run enterprises have been higher than anticipated.

“We expect the government to end FY14 with dividend/profit collection of 0.85% of GDP, exceeding its target of 0.65%," the report said.

The government has so far received around 6,000 crore from disinvestment proceeds, against a targeted 40,000 crore. The ongoing spectrum auctions are likely to yield enough revenues to meet the budgeted proceeds, the report said.

The government should see inflows of around 18,000 crore from the spectrum auction that concluded on Thursday in the current fiscal itself.

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