Economic headache adds to govt's all-round political pain

Mid-year analysis shows up fiscal worries; chances of economic recovery eyed by govt dim.

The government is hopeful of a slightly better second half for the economy to clock 7.5 per cent growth this financial year. However, fiscal concerns have stymied the optimism, as the finance ministry has admitted none of the three parameters mandated by the fiscal consolidation legislation could be met in the first half.

Though the mid-year analysis of the economy, tabled by finance minister Pranab Mukherjee in the Lok Sabha, hopes overall inflation will fall to seven per cent by the year-end from 9.73 per cent in October, it expresses disappointment over the slow pace of decline.

Mukherjee conceded it would not be easy to rein in the fiscal deficit to 4.6 per cent of GDP during 2011-12, as set out in the Budget.

The review said maintaining the economic growth momentum with price stability was one of the biggest challenges, showing the dilemma the central bank would face in its December 16 policy. The analysis pegged economic growth at 7.5 per cent, with a band of 0.25 per cent on either side. However, economists said growth would fall to the lower side of the band. The economy grew 7.3 per cent in the first half of the financial year.

“Definitely, it will be on the downside,” CARE Ratings chief economist Madan Sabnavis told Business Standard.

MID-YEAR EXPECTATIONS

* GDP to grow 7.5% this financial year. That means it must grow better than 7.3% in first half, but outlook dim

* FM admits all three fiscal consolidation parameters not met in the first half

* Govt expects economy to witness some revival in 2012-13, but says outlook mixed

* RBI monetary policy expected to probably work to bring down inflation

The analysis expects the economy to witness some revival next year, with a caution that the outlook remains mixed.

Talking to reporters, Mukherjee said, “The major areas of concern are how to come back to a higher growth trajectory while maintaining inflationary pressures at a tolerable level and insulate the economy to the extent possible from the adverse impact from other parts of world.”

If the US and Europe stabilise, the ministry expects the economy to recover close to the pre-crisis period of nine per cent growth, as is the target for the long run.

On fiscal consolidation, the amount of non-debt receipts in the first half have to be more than 40 per cent of the Budget estimates for the entire year and revenue deficit has to be less than 45 per cent. In case any one of these is not met, the government would be required to take corrective measures under the Fiscal Responsibility and Budget Management (FRBM) Act.

Deloitte, Haskins & Sells director Anis Chakravarty said, “The fiscal deficit target is not going to be met in the second half as well.”

If the government is to take corrective measures, what are the options? Raising revenues will be crucial. On this front, disinvestment is important, as of the Rs 40,000 crore target, the government has so far got just over Rs 1,100 crore. The review expressed difficulty on this front, given the trends in the capital markets.

Net direct taxes grew just 8.48 per cent for April-November year-on-year because of huge refunds, while indirect tax rose 16.85 per cent. So, the government will have to rely on expenditure to meet the fiscal consolidation target. But, it has already sought over Rs 56,000 crore in the second supplementary, as the subsidy burden has increased.

With eight core industries showing more or less flat growth in October and industrial growth expected to be dismal in the month, the guidance does not seem to be what the ministry suggested.