Ind-Ra: Government Likely to Miss FY16 Fiscal Deficit Target

The FY16 fiscal deficit is likely to rise to 4.1% of GDP, higher than the government budgeted target of 3.9%, says India Ratings and Research (Ind-Ra). While the miss is due to lower than expected GDP, the absolute fiscal deficit is seen close to the budgeted figure at around INR5.56trn which is a rise of 8.5% yoy. Fiscal deficit for the first eight month of FY16 stood at INR4.83trn, which is 87% of the budgeted deficit for the full year.

The main reason for the higher than budgeted fiscal deficit as a percent of GDP is the likely lower nominal GDP growth rate in FY16 than the 11.5% nominal GDP growth assumed in the FY16 budget estimate. Nominal GDP growth FY16 is expected at 9.6%, weaker than budgeted due to the lower than expected inflation. Ind-Ra estimates that wholesale prices on an average have declined by 1.4% yoy in FY16. Tax revenues for the period April-November stood at 50% of the full year budgeted, at INR9.19trn.

 

To achieve the 3.9% fiscal deficit target, fiscal deficit will have to be compressed by INR211bn. Ind-Ra believes this can be achieved only by i) deferring parts of the subsidy payments to FY17, ii) cutting down capex or iii) a combination of both. Cutting down capex, when the need is to step up government investment, will be counterproductive.

FY16 will be a mixed bag for government finances. Government finances are likely to gain from i) higher excise duty collection, ii) higher dividend paid by the RBI, and iii) lower oil subsidy. Government finances are likely to be strained due to i) lower disinvestment revenue realisation and ii) higher food/fertiliser subsidy. Crude prices have almost halved to around USD32/bbl from USD58.6/bbl a year ago, which has given the government headroom to increase excise duty on fuel, while subsidies have declined substantially.

According to the medium-term fiscal policy statement published along with the FY16 budget, the fiscal deficit target for FY17 and FY18 is 3.5% and 3.0%, respectively. However, Ind-Ra believes achieving these targets in view of the likely acceptance and implementation of the recommendations of the the Seventh Central Pay Commission will be difficult. Ind-Ra expects the fiscal deficit of FY17 to come in at 3.9% of GDP. This will push the attainment of the fiscal deficit target of 3% of GDP to FY19, a year later than envisaged in the fiscal policy statement. In the past also, pay revisions have pushed fiscal consolidation targets. Accordingly, the fiscal deficit targets are likely to be 3.9%, 3.5% and 3.0% in 2016-17, 2017-18 and 2018-19 respectively.

In view of the above, stepping up government capex is indeed going to be challenging. Yet, Ind-Ra believes the government will have to catch the bull by the horns and find ways to step up public investment.

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