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The finance ministry on Tuesday sought to paint a brighter picture of the economy — a day after data showed the twin deficits were at uncomfortable levels — presumably to soothe rating agencies.
The ministry exuded confidence of containing the Centre’s fiscal deficit at the budgeted 4.8 per cent of gross domestic product (GDP) for 2013-14, attributing the high figures for the first five months to front-loading of expenditure and the low revenue numbers in the initial months. The numbers released on Monday showed that the Centre’s fiscal deficit had touched almost 75 per cent of the Budget target in just five months. The ministry was also sure that it would restrict the current account deficit (CAD) to $70 billion in the current financial year from $88 billion a year ago.
Analysts expect the CAD to be much lower. However, Economic Affairs Secretary Arvind Mayaram did not want to be carried away, at least for now. He told a press conference here that the finance ministry was conservative in its estimates and would like to peg the CAD at $70 billion only. “We are confident that we will be able to contain CAD at $70 billion and get additional capital flows to finance it fully without drawing down from forex reserves. I would also like to state that the fiscal deficit target of 4.8 per cent would be met.”
Economic growth would be over five per cent in the current financial year, Mayaram said. Growth had crashed to a four-year low of 4.4 per cent in the first quarter of 2013-14.
The CAD, fiscal deficit and economic growth are the primary parameters for rating agencies to assess India’s ratings. Standard & Poor’s, Moody’s and Fitch had assigned the lowest investment grade to India. S&P had even threatened to downgrade it to junk. A downgrade would send wrong signals to investors, at a time when capital inflows are required to fund the CAD.
The economic affairs secretary reiterated the ministry’s stand that economic growth needed to be incentivised, though he fell short of telling the Reserve Bank of India (RBI) Governor Raghuram Rajan to do his bit on the interest rate front. “As far as interest rates are concerned, that is in the domain of the RBI and the governor will take a call when time comes.”
On the US shutdown, Mayaram said he was certainly hopeful that it would not seriously impact the US economy. “We hope it will not, so that there is no spillover to the global economy. I don’t see any major impact on the Indian economy on that account.”
He said CAD without gold imports would have been $14.5 billion in the first quarter of 2013-14 against the actual of $21.8 billion. CAD stood at 4.9 per cent of GDP in the quarter against four per cent in the previous Q1. The ministry has pegged CAD at 3.7 per cent of GDP in the current financial year against the record 4.8 per cent in 2012-13.
Mayaram exuded confidence that capital flows would go up significantly in later parts of the year, because of which there was no need to draw down from forex reserves to finance the CAD. There was a withdrawal of $300 million in the first quarter to finance CAD.
Giving reasons for his hope on the fiscal deficit front, Mayaram said tax collections up to August showed a growth of 8.7 per cent year on year. However, for the month of August, tax collections grew by 18.3 per cent year-on-year. Preliminary figures for September showed further improvement.
“It would be relevant to state here that bulk of revenue collections come in the second half of the financial year. Planning of the government takes into account this fact--two-third of the borrowings to the tune of 2-3rd were loaded in the first half.”
He said expenditure was higher to the tune of 39.8 per cent of BE in April-August mainly because of plan expenditure which rose to 33 per cent of BE compared to 28 per cent in first five months of the 2012-13. “Higher plan expenditure was deliberate to give funds to various welfare schemes of the government.”
On non-plan side, he said mentioned that austerity measures have already been announced by the government.
Mayaram said the government will not require additional borrowings than planned to finance fiscal deficit. The government had pegged borrowings at Rs 5.79 lakh crore for 2013-14.
To a query that analysts have pegged economic growth at less than five per cent this financial year, the secretary said they have revised down CAD figures now and similarly they would raise the growth numbers beyond five per cent.
Mayaram rolled out statistics to bring home the point that economic growth is showing an uptick. He said growth in the second quarter would be more than the first, but refused to specify any number.
“Finance Minister (P Chidambaram) had said growth is likely to pick up from Q2 onwards, mainly on account of three factors- increase of sown area, acceleration in the pace of expenditure, impact of projects cleared by the Cabinet Committee on Investments. The recent data reinforces what the FM had said.”
The index of industrial production (IIP) growth entered into positive territory and stood at 2.6 per cent in July y-o-y.
The secretary said he was confident that even consumer durables which continued to post negative growth will show expansion due to festival demands.
Eight core industries which has a combined weight of almost 38 per cent in IIP registered a growth of 3.7 per cent in August, he said. “The most encouraging is the pick up in electricity generation by 6.7 per cent--due to hydro power on account of good rains. Other encouraging data was on uptick in growth in construction-- both steel and cement were up 5.5 and 4.3 per cent respectively year-on-year”.
Besides, he said coal production grew 5.5 per cent, the highest reading since November, 12. “This would have beneficial impact on the external account as the coal and gold along with oil imports have risen sharply last year.”
On the US shut down, Mayaram said he is certainly hopeful that it will not seriously impact the US economy. “We hope it will not, so that there is no spill over to the global economy. I don’t see any major impact on the Indian economy on that account.”
However, he said the ministry needs to be watchful and continue to work towards encouraging capital flows.
He also said that the ministry is encouraged by the currency stability of the rupee. “And we will continue to world towards making the rupee stable. We are watchful. Whatever measures are required to be taken we will not shy of taking them if they are warranted.”
The rupee has been hovering
