Standard Chartered sees marginal breach in FY’14 fiscal deficit target

Finance Minister P Chidambaram has been saying that the 4.8 per cent fiscal deficit target is a red line and that will not be breached.

The StanChart economists said the 0.20 per cent slippage will be due to slower tax revenue collection and uncertainty about realising non-tax revenue. Though the fiscal deficit target can be met by cutting spending,the upcoming elections are a deterrent.

“Based on the trends observed so far on tax collections,we expect tax collection to fall short by 0.65 per cent of GDP this fiscal,” the report added.

On expenditure triming,the UK lender said “we believe Government can reduce spending by 0.7 per cent of GDP,which could reduce FY14 expenditure growth to 17.7 per cent and imply growth of 10 per cent in H2. But such reductions will have an adverse impact on the already weak growth.”

The report noted the government has crossed 76 per cent of its borrowing target in H1 itself,the widest ever recorded in over a decade.

“The Government’s ability to adhere to its 4.8 per cent deficit target will depend on one-off revenue items (disvestment and spectrum auction proceeds) and its willingness to curtail spending.

“It may still be able to achieve the target,but we believe lack of political will to curb expenditure ahead of the elections will keep these concerns a risk to the Indian economy,” the report said.

On the impact of the 76 per cent drawal in H1 alone and its implications for H2,the report said sharp widening of fiscal deficit was driven primarily by slower tax mop-up and negligible proceeds from budgeted lumpy revenue items.

Fiscal deficit may correct sharply for a few months in H2 in contrast to the average deficit of Rs 68,000 crore per month in H1 on the realisation of lumpy revenue,especially if it coincides with quarter-ends,the report said.

Lumpy revenue needs to be in line with budgeted amount to avoid fiscal slippage,as expenditure cuts can at best only offset lower-than-expected tax collection,it said.

Weak GDP growth takes a toll on taxes,the report said and noted that net tax collection slowed to single digits in H1,much lower than the 19.2 per cent budgeted growth.

Yesterday,the Government said direct tax collection rose 11.58 per cent in the April-October period to Rs 3.37 lakh crore,up from Rs 3.02 lakh crore during the same period last fiscal. The government has fixed direct tax collection target of over Rs 6.68 lakh crore for this fiscal,envisaging a growth of 19.2 per cent over Rs 5.65 lakh crore in FY13.

The gross collection of corporate taxes rose 8.23 per cent to Rs 2,09,622 crore during April-October,while personal income tax shot up 17.89 per cent to Rs 1,25,078 crore.

Net direct tax collections rose 13.33 per cent to Rs 2,84,339 crore during April-October,as against Rs 2,50,900 crore in the year-ago period.

StanChart said large slippage was evident,especially in excise collection,and corporate tax and services tax collection with personal income tax being the only exception.

The slowdown in services tax collection was driven by a lack of clarity on the services tax base – in March 2013,the Government widened the base,except for a small negative list of service items – and confusion over a services tax amnesty scheme. On the other hand,slower GDP growth has weighed on corporate and excise tax collection,it said.

Nominal GDP growth in FY14 is unlikely to meet the government’s expectation of 13.4 per cent,but the report has pegged it at 10.7 per cent.

Though the Government may be able to get the budgeted spectrum auction proceeds in January,the market is not sure about the disinvestment target of 0.56 per cent of GDP.

H1 saw expenditure growth of 16.6 per cent,which is lower than the estimated 18.2 per cent. As a proportion of annual spends,however,the government spent 48.6 per cent of budgeted amount in H1,higher than the past five years.

On revenue side,the report said even though the government is likely to meet its target of budgeted proceeds from service tax,corporate and excise taxes are likely to fall short of the target as industrial recovery may be muted. On non-tax revenue front,the report said the government has not been able to collect disinvestment and telecom-related revenue more than 0.01 per cent of GDP in H1,against a budgeted Rs 96,000 crore,or 0.96 per cent of GDP.

Of the Rs 40,000-crore divestment proceeds,the Government has so far been able to collect only around Rs 1,400 crore.

Though the Government has committed to cap the subsidy burden at 2 per cent of GDP,the foreign lender sees marginal slippage in petroleum subsidy (0.1-0.15 per cent of GDP) despite the recent correction in the rupee and crude oil prices,as it has refrained from sharply increasing diesel price.

However,the new food subsidy law is unlikely to result in any additional pressure on expenditure as its implementation before Q4 looks remote. Also,a large share of administrative and infrastructure costs are likely to be deferred to next fiscal,the report said.

“We,therefore,expect slippage of 0.15 per cent of GDP on the subsidy front.”

Given the poor fiscal health,the Government has mandated a 10 per cent reduction in non-planned spends,excluding those on items like interest payments,salaries and subsidies.

“We believe,however,that such a mandated cut in non-planned expenditure will not be large enough to meet its fiscal target,” the report concluded.