India's fiscal deficit not to come down soon

Foreign lender HSBC on Monday said the government's fiscal deficit target of 4.8 per cent 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 per cent of the gross domestic product in this fiscal, but HSBC said the spending-revenue gap may overshoot to 5.1 per cent.

"The Finance Minister has put a line in the sand when it comes to deficit and he last year delivered on his promises.

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“We, therefore, believe the deficit will end up quite close to the target, but slightly higher at 5.1 per cent of the GDP," it said in a note.

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

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

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The minister had set 19.3 per cent revenue growth this fiscal, but it has been only a little over 14 per cent 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 per cent target for this fiscal and said his  Ministry has front-loaded expenditure in the initial part of FY14.

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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.