HSBC sees fiscal deficit breaching 5% mark in FY14

Foreign lender HSBC today said the Government's fiscal deficit target of 4.8% for FY14 is likely to be breached as the revenue growth has slowed, while expenditure has gone up in the first half of the fiscal.

Finance Minister P Chidambaram has been repeatedly stressing he will meet the fiscal deficit target of 4.8% of the GDP in this fiscal, but HSBC said the spending- revenue gap may overshoot to 5.1%.

"The Finance Minister has put a line in the sand when it comes to deficit and he last year delivered on his promises. We, therefore, believe the deficit will end up quite close to the target, but slightly higher at 5.1% of the GDP," it said in a note here.

Stressing that the spending will get compressed by up to 1% of GDP in the second half, the British lender said this will impact GDP growth by up to 0.5-0.7% and make it difficult for it to recover.

It noted that even as the revenue growth is slower than normal - only 35% of the target was met in the first half as against the normal 40% - the Government has gone on an overdrive on the expenditure front, exhausting 84% of the fiscal deficit target in the first half.

The Minister had set 19.3% revenue growth this fiscal, but it has been only a little over 14% as of November. "Delivering fiscal tightening will be a challenge," it said, adding the Government will have to compress the expenditure harder to meet the fiscal deficit target.

Last fiscal, Chidambaram was able to better the fiscal gap target on the back of massive expenditure cuts. He has repeatedly stressed that he will not breach the red line of 4.8% target for this fiscal and said his  Ministry has front-loaded expenditure in the initial part of FY14.

The Government was forced to act on the fiscal deficit target because of the pressure from the rating agencies who had threatened to downgrade India's sovereign rating to junk status because of the fiscal slippage and other reasons.

HSBC noted that apart from expenditure rationalisation measures, the Government has initiated steps to mobilise more money through dividend payments, but that "high quality steps" like diesel price deregulation are needed which may not be feasible politically given the upcoming general elections.