India Economy - Fiscal deficit - Low nominal GDP growth is the Achilles heel: AnandRathi Financial Services

India Economy - Fiscal deficit - Low nominal GDP growth is the Achilles heel by Mr. Sujan Hajra (Chief Economist - AnandRathi Financial Services Ltd).

The fiscal deficit (FD) for 9MFY16 has reached Rs. 4.9trn, which is 88% of the full year target (Rs. 5.6trn). Tax collections have remained buoyant led by indirect taxes. Expenditures have been mainly on roads and railways, plan revenue spending trending down. While maintaining the fiscal deficit for FY16 in absolute terms looks on course, the low nominal growth is likely to push the FD to 4.0%. Maintaining 3.5% FD target for FY17 looks unlikely.

Performance: In 9MFY16, the FD climbed to Rs. 4.9trn, 88% of the yearly target. The gross tax collections have improved to Rs. 9.6trn (vs. Rs. 8.0trn during 9MFY15). Collections from both customs and excise have touched 75% of the Budget expenditure. The disinvestment proceeds are Rs. 127bn for 1HFY16, and the full year target has been revised down from Rs. 695bn to Rs. 300bn. There were sharp rises on the budgeted spending on roads and railways. Spending on these sectors has been 85% and 70% of the BE respectively. The overall expenditure has risen to Rs. 13.1trn in 9MFY16 against Rs. 12.4trn in the previous year.

Assessment: As a percentage of the full year target, the figures for 9MFY16 have been better than the past two years, when full year target was exhausted by Dec. Corporate income tax collection has dwindled, which has been counter balanced by indirect taxes. While sharp fall in crude prices have helped accumulation of excise duties, the import of capital goods have propped up revenue from custom. The expenditure has been skewed towards roads and railways. Plan revenue spending has been 70% of the BE and the growth is moderating.

Outlook: Achieving the fiscal deficit target of Rs. 5.6trn looks likely. Nominal GDP growth of 11.5% factored in by the Budget, however, looks unattainable (1HFY16 nominal growth 7.4%). We expect the nominal growth to be at best 10%, which will push up the FD to 4% of GDP for FY16. Due to low nominal GDP growth, we see continued deviation from the fiscal roadmap and expect the FY17 FD to GDP to be 3.6-3.7%. Moreover, we expect the government to put a more realistic disinvestment target in FY17 (Rs. 300bn). In addition, expenditure growth is likely to be greater than 8% because of the 7th Pay Commission and One Rank One Pension.

Recommendations: The fiscal discipline (excluding disinvestment) maintained by the current government may help ignore the slippage as percentage of GDP. Trying to maintain the fiscal consolidation path by setting unrealistic divestment targets would be discounted. At the same time, increasing the implicit FD target for FY17 in rupee terms would put pressures on the debt market. We feel that any effort to increase capital spending would be matched by increase in indirect tax rates.

Source : Equity Bulls

Keywords