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  • Will The Government Meet The Fiscal Target This Fiscal Year? 0 comments
    Dec 7, 2012 6:43 AM

    While, the government is considering the budgeted expenditure, in order to meet the fiscal deficit target, a whole lot of analysts believe that India will likely miss its revised fiscal deficit target for the financial year ending in March. This obviously raises eyebrows over the government's efforts to prevent a credit rating downgrade.

    Pressurized by global rating agencies and the central bank of the country, the government had announced a new plan last week to keep the fiscal deficit at 5.3% per cent of the gross domestic production (NYSE:GDP) this financial year. This target is much lower than last year's target of 5.8%, although it is much higher than a previous target of 5.1%.

    India's fiscal deficit has swelled the most among major emerging economies, largely due to huge spending on subsidies for items such as food, fuel and fertilizer. Despite the recent hikes in prices of fuel and fertilizer, the government's subsidy bill is expected to remain inflated.

    The government has announced a slew of reforms since mid-September, which includes raising the price of subsidized fuel and fertilizer. But analysts estimate the spending on fuel and fertilizer subsidies is estimated to be Rs. 1.6 lakh crore this fiscal year, higher than the Rs. 1.04 lakh crore budgeted in March.

    At the same time, growth is not likely to bounce back significantly this year due to delays in implementation of economic policies and also due to the global slowdown. This has forced the finance ministry to revise the deficit target upwards and look at ways to save money and increase revenues.

    Although the market and several analysts have cheered the recent reform measures taken by the government but the measures doesn't confirm the prevention of a rating downgrade. This is because the measures announced a month back are a marginal correction in the largely swelling fiscal deficit. These measures have also met stiff protests across the country.

    On the other hand, lower-than-estimated non-tax receipts also make it difficult to believe that the government would achieve the deficit target. In a slowing economy, subdued tax revenues are further intensifying difficulties for the government. However, in order to compensate the effect of sluggish tax revenues, the finance ministry has started counting on proceeds from share sales in state-run companies and an auction of telecommunications spectrum. The government aims to raise Rs. 70,000 crore through such sales and through the auction of cell phone airwaves.

    But, several economists and analysts believe that the government would fall short of revenues and that could force the government to borrow an extra Rs. 40,000 crore through bonds as early as December. However, Mr. P.Chidambaram last week said that a revision in the fiscal deficit target would result in additional market borrowing up to the new level, which will amount to at least Rs. 20,000 crore.

    Last year, the government had borrowed Rs. 92,900 crore (22%) more than the budgeted amount to fund a deficit that overshot the original target by 1.2%. This would definitely raise concerns that how would the government manage the ballooning fiscal deficit this year, where it is faced with threat of rating downgrade by several global rating agencies. Can the country overcome the downgrade threat? Let's wait for few more months.

    Capital Trends has published this article, the owner of this company is Parvesh Sharma who has ample experience in equity portfolio modeling and pennant capital .

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