Search the Internet          Tips  Sites: Finance, Investment

India's fiscal deficit seen close to target

India is likely to keep its fiscal deficit close to target this financial year, an unusual feat given past slippages, but it will be mainly because a larger target was set at the beginning of the year and not due to fiscal prudence, analysts said.

Most analysts expect the federal government to end 2000-01 (April-March) with only a marginal excess of Rs 50-60 billion over its fiscal deficit target of Rs 1.17 trillion.

Some analysts are even hopeful the government will restrict its fiscal deficit to the targeted 5.1 per cent of GDP. In 1999-2000, the federal government ended up with a fiscal deficit of 5.6 per cent of GDP, slipping from a target of 4.5 per cent.

For debt markets, it means a departure from the customary large government borrowing and upward pressure on interest rates at the year-end.

"This year the slippage in fiscal deficit is one of the lowest in many years...It is a mixture of good tax revenues and fairly realistic expenditure projections," M R Madhavan, vice-president at Bank of America, said.

In the first eight months of the year, the government's fiscal deficit was just 57.8 per cent of the annual target.

Revenue collections were impressive and even expenditure was within target, raising suspicion that the government had deferred large payouts.

Analysts said Finance Minister Yashwant Sinha deserved a pat on the back for staying close to fiscal targets, despite disappointing progress in raising a target of Rs 100 billion from sale of stakes in state-owned firms.

They lauded new fiscal legislation introduced by the government which aims to force a gradual reduction of the deficit, although scepticism is rife about the ability of the government to convince cantankerous coalition allies and opposition parties to give the plan the go-ahead.

Revenues compensate

The numbers look good when compared with last year, when borrowings exceeded the budgeted figure of Rs 799.55 billion by about a third.

But this year, the budget set a high target keeping in mind that approximately 60 per cent of the expenditure towards interest payments, wages and defence cannot be easily slashed.

Sluggish industrial growth is depressing indirect taxes, but higher direct tax receipts from a wider base are boosting revenue.

Further, the Reserve Bank of India's annual transfer of income to the government, a massive Rs 93.5 billion, is twice last year's.

That will partially bridge the shortfall from divestment where the pace has been slack this year, in line with the trend of the past decade.

The government raised just 40 per cent of a targeted Rs 443 billion between 1991-92 and 1999-2000.

This year, it seemed more determined to proceed with privatisation, fighting political opposition and labour unions, but plans to divest stakes in telecommunications, oil, banking and other major sectors have yet to be firmed up.

Sinha's intentions for the next year will be known when he unveils what he has promised will be a growth-oriented 2001-02 budget in February.

Legislation too idealistic

The Fiscal Responsibility and Budget Management Bill 2000 was tabled last month, but even if it gets parliamentary assent, analysts fear it is too austere to be implemented.

The bill seeks to curtail fiscal deficit to 2 per cent of GDP and eliminate revenue deficit in five years.

It calls for transparent practices, a quarterly review of finances and remedial action in case of deviation.

But, there are loopholes that may dilute the intended fiscal contraction. The bill says targets can be relaxed in case of unforeseen demands on national security or a natural disaster.

Analysts are hoping the federal government does not cut down on crucial development expenditure needed to spur growth in an already sluggish economy or lower fund transfers to the 29 state governments.

The bill also ignores finances of the states, whose combined deficits were just marginally lower than the centre's last year.

"The single-most glaring deficiency in the bill is the absence of reference to state finances...the government is targeting only 50 percent of the problem," JM Morgan Stanley said in a recent report.

And analysts predict starting trouble even before the bill gets cleared. With provincial elections due in several states next year, politicians may not accept any spending cuts.

Tell us what you think of this report