Divestment target likely to be halved : DBS Research Report

As flagged earlier, this year's divestment target at INR 695bn (0.5% of GDP) was ambitious. Press reports yesterday cited the Divestment department sug­gesting that the target should be halved. This does not come as a surprise given the unimpressive past track record when less than half of the targets were met and bulk of which were raised late in the respective fiscal years.

Progress on the divestment front has been slow in the first half of the fiscal year (Apr-Sep15).

Total proceeds amounted to less than a fifth of the annual target (30% of public sector asset sales target), with only two quarters of the fiscal year left. Earlier indications of a new strategy to regularise asset sales proved to be a challenge given the volatility in the financial markets and freefall in commodity prices. Another big-ticket deal in the pipeline is a 5-10% stake sale in the coun­try's largest coal mining company. A 10% stake-sale can single-handedly meet half the annual target, although indications are that this sale might get delayed to the next fiscal year.

A potentially lower divestment target and anticipated shortfall in tax collec­tions (0.3% of GDP) put the FY15/16 fiscal deficit goal of -3.9% of GDP at risk. Added to the mix is the Apr-Aug fiscal deficit which already stands at 67% of the budgeted target. Sep numbers are due this week, with the one-off fiscal surplus in Aug likely to reverse out. Wage increases for government employees, pen­sion schemes and higher capitalisation needs for public sector banks also pile additional pressure. These needs will constrain the headroom to step-up capital spending in the coming months.

Despite these pressures, fiscal targets are unlikely to be breached though quality of fiscal consolidation will underwhelm. Tax collections lag estimates but non-tax revenues are up a strong 36% YoY between Apr-Aug15. These collections were also buoyed by a record jump in RBI's surplus transfers to the government, up 22% from year before. Dividends from state-owned companies are also ex­pected to add to this kitty along with spectrum inflows. Finally, given the gov­ernment's emphasis on fiscal consolidation, risks of overshoot of targets will be mitigated by expenditure cuts to stay within the -3.9% of GDP red line.

Longer-out, structural improvements are required to bring fiscal balances on a stable footing. Need to raise tax revenues to GDP from ~10% of GDP is a priority, by expanding the tax base and tightening collections. Passage of the nationwide Goods and Services tax at the winter parliamentary session is also being watched with interest. Meantime, the Expenditure Commission headed by former RBI Governor Bimal Jalan is also due to table its recommendations by end-year, which is widely expected to help streamline expenditure and lower non-energy subsidies in the coming years. These will help the government stay on track the medium-term roadmap and narrow the deficit to -3% of GDP by Mar18.

Source : Equity Bulls

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