FM’s biggest worry, reining in fiscal deficit, is far from over.

The current account deficit (CAD) numbers, which showed a slight spike in the first quarter, are expected to moderate going forward, thanks to the government’s curbs on gold and non-essential imports. But despite this relatively positive prospect, finance minister Palaniappan Chidambaram is unlikely to be a relieved man these days. Reason? His biggest worry, reining in the fiscal deficit, is far from over and, by most accounts, things are likely to get tougher from here on.

Chidambaram will likely have to focus on pulling out all stops and stay within the promised ‘red line’ of limiting the deficit to 4.8 percent of GDP. Given the current scenario, that will need some doing.

Consider the facts. Already, in the first five months has seen about 75 percent of the fiscal deficit target for FY14, despite the finance minister repeatedly vowing to keep the deficit within the promised limit. But clearly, the going so far has not been good. What is worse, with elections looming round the corner and the government once again battling new – and somewhat self-inflicted crises – pushing through key policy decisions which will impact the fisc positively look tougher by the day.

Already, experts and analysts have begun predicting that the fisc will likely end up crossing Chidambaram’s ‘red line’ and end up beyond the 5 percent mark by the time the fiscal year is over. These estimates are based on a likely shortfall in tax revenues, lower than estimated proceeds from disinvestments and spectrum auctions and an upside in oil subsidies. A 5.5 percent fiscal deficit level is what some sections of analysts are projecting.

A note from YES Bank, for instance, pegs a fiscal slippage of 0.9 percent of GDP for FY14, given the challenges of tax revenues, disinvestments and oil subsidies.

“The bulk of onus to rein in the extent of slippage will fall on curtailment in discretionary expenditure yet again in FY14 along with subsidy management to be able to meet the fiscal deficit target,” the bank says.

“Despite this envisaged austerity, plan expenditure would post an increase of 20 percent on an annual basis – thereby balancing the need to crowd in private investment while absorbing the excess of fiscal slippage,” it adds.

Kotak Mahindra Bank analysts, on their part, warn that the two key revenue side worries for the government are lower tax revenues, particularly indirect taxes, and lower disinvestment receipts.

“Gross tax collection growth in April-August 2013 was at 8.7 percent, lower than the budget estimate of 20 percent and our estimate of 16 percent. The weakness is most pronounced in the indirect tax collection which grew only 3.5 percent while direct taxes grew 15.6 percent. Indirect taxes growth in July and August has not been too encouraging, at 5.7 percent and 8.4 percent respectively. Excise duty collection in April-August contracted 11 percent from same period last year with the August growth at (-)2.3 percent,” the Kotak analysts added.

This view is also echoed by YES Bank, which says based on the trend so far in the first five months, it appears that tax revenue collections will undershoot the budgeted target. The sequential slowdown in growth momentum has weighed on run rate of tax revenue generation, which is expected to remain under pressure, with nominal growth in FY14 anticipated to be slower versus FY13. “Assuming a nominal GDP growth of 11 percent (lower than the budgeted estimate of 13.4 percent) and a likely revenue growth of 16.5 percent in taxes, we expect a revenue shortfall of ~Rs 21,000 crore in FY14. This will add 0.2 percent of GDP to fiscal deficit,” the bank says.

But the biggest worry comes from the oil subsidies side. Fitch Group company India Ratings (Ind-Ra) says oil subsidy alone could push the fisc beyond the 5 percent mark, with the rupee depreciation likely to add to the oil subsidy to the extent of 0.1 percent to 0.4 percent of GDP.

“According to Ind-Ra’s estimates, the under recovery of oil marketing companies (OMCs) will increase by Rs 54800 crore annually if the Indian crude basket price rises by Rs 1,000/bbl. This would translate into an increase of Rs 34000 crore in the government of India’s (GoI) oil subsidy burden,” the ratings firm says.

India Ratings says although the rupee has appreciated between end-August and mid-September, it is unlikely that it will appreciate to Q1FY14 levels. While this rise in the rupee, coupled with easing of the geo-political situation, may provide some relief on the oil subsidy front, much would depend on aligning retail prices of diesel, LPG and superior kerosene oil to international crude prices. “Under recovery on the sale of diesel is highest among the three regulated fuels. Oil subsidy could be controlled through rationalising retail selling prices of all three fuels,” it says.

With the economy slowing down and impacting tax receipts, disinvestments likely to disappoint the government and oil subsidies being hit by the rupee, Chidambaram and his colleagues at North Block have a cocktail of problems to deal with. Political will to push through a number of reforms is what is needed to deal with these challenges. In the absence of that, the red line which the finance minister spoke of will be breached. For Chidambaram who vowed to keep the fisc in check, it’s also about his own credibility.

Source : firstpost.com