Two sets of data were released by the government – current account deficit and fiscal deficit. Like a child receiving his answer papers and showing the one where he scores higher, government is trying to highlight its achievement talking only about the better of the two.
Current Account Deficit (CAD
) for the June quarter at $21.8 bn is better than analyst expectation of $23 bn. As a pendulum swinging from one extreme to another, analysts are now predicting that going forward CAD will come down to $10 billion in the September quarter and the year-end figure can be less than $60 billion (around $14 billion per quarter). Let’s accept this number for the moment.
CAD has been way above the RBI
comfort zone of 2.5-3% of the GDP
for nearly three years now. And Gold
has borne the blame for this deterioration.In the year 2011-12, out of the CAD of $78.2 bn, net gold imports
stood at $49.2 bn (net of exports
). Looking at it differently, out of the 4.2% of deficit in that year 2.7% was on account of gold imports.
Net gold import of $49.2 bn in 2011-12 accounts to around $4.1 bn per month or $12.3 bn per quarter. If we remove this figure from the current CAD of $21.8 billion, CAD can be below $10 bn. But this does not take into account the rise in exports during the period and fall or rise in imports of other commodities. Further, the assumption is that we will be importing gold and exporting all of it, thus at the net level there will be no imports.
It is true gold imports have crashed in August 2013 to around 3 tonnes as compared to 35 tonnes in August 2012 and 142 tonnes in June 2013. Imports have improved marginally from its low in September and are likely to pick up in October as festive demand increases. Traders in the bullion market say that imports during the October to December 2013 months are likely to be in the range of 70-75 tonnes. So much for optimism on CAD numbers.
We now look at the numbers where the government has not scored well.
In the first five months of the current fiscal, government has reached 74.6% of the fiscal deficit target of the entire year’s Budget estimate (BE). Finance Minister P Chidambaram
has repeatedly said that this year's fiscal deficit target will be 4.8% of the gross domestic product (GDP). Now everyone knows Chidambaram is a man of his words. If he says 4.8% of GDP will be targeted, he will see to it that the figure is achieved. He might have kept a couplet from Thiruvalluvar, his favourite poet ready when he achieves it.
But the question is how will he achieve it, especially since in the first five months 75% of the deficit target has been reached. The last time fiscal deficit crossed 75% in the first five months, the country posted a record deficit of 8%. But that was in 2008-09, a year of global financial crisis. This time it’s different, let’s pray.
This year the fiscal deficit number is high because of an enormous rise in Plan expenditure. It could be a result of back-log of previous year, when there was a complete clamp down on plan expenditure so that the finance minister could keep his word of meeting the target of 4.9%. Higher plan expenditure could also be because government would have front-loaded this year’s expenditure as the remaining year would be lost in elections and there would be restrictions in taking up new projects.
In any case, it will be an uphill task to meet the fiscal deficit target. There are only two ways it could be done. Increase the revenue or cut expenditure. A small increase in IIP numbers have buoyed Economic Affairs secretary Arvind Mayaram to say that there will be a pickup in tax collections going forward. Let’s wish him luck and hope that the IIP numbers based on which he made the prediction are not a dead cat bounce, because few believe the sharp jump in capital goods numbers disclosed by the government.
Further, government will need more than tax collections to bridge the gap. It will need to meet its divestment target of Rs 40,000 crore. In the first five months, it could divest only Rs 1,434 crore worth of PSU stocks. While Coal India, the biggest divestment is still pending, there are labour issues which can delay if not result in cancelling its divestment.
Clamping on further expenditure seems to be the only possibility. In the first five months of previous fiscal, deficit had touched 65.7% of the budgeted estimate (which was stated at the start of the year at 5.1% of the GDP). Yet Chidambaram managed to bring it down to 4.9% of GDP by slamming the brakes hard which resulted in a sharp fall in GDP growth. This year he will need his feet along with the brakes to achieve the target, especially since the government has implemented the food security bill and started distributing freebies which will only increase as elections are held.
A government orchestrated shutdown in India in the second half is a possibility which can stall all hopes of growth. Yet we worry about a US shutdown.
By the way why are the markets rallying?