FinMin confident of meeting 5.3% deficit target

Says no to stimulus, favours reforms to boost business confidence

Ruling out any fiscal stimulus to industry and, instead, favouring reforms to boost investor confidence, the finance ministry today stuck to its fiscal deficit estimate of 5.3 per cent of gross domestic product (GDP) for the current financial year. It, however, admitted meeting the target would be challenging, given the possibility of subdued tax collections, receipts from the 2G telecom spectrum auction and disinvestment, and a higher subsidy burden.

“Given the tight Budget situation, structural reforms can perhaps be made (to boost industry), instead of fiscal sops,” Chief Economic Advisor Raghuram Rajan told a press conference after the ministry released its mid-year economic analysis for 2012-13.

On the scope for more reforms, Rajan said the government had to first get the fiscal measures and their implementation right. “I would like to see some changes in the business environment... Creating a better business environment for small and medium enterprises,” he said.

He included strengthening of financial infrastructure as an important part of reforms. “Improving corporate bond market is also what we need to do. The number of measures we need to take include (ensuring) vibrancy of the equity market and its ability to finance infra requirements,” he said, refusing to elaborate.

He said the ministry was examining industry’s various recommendations to boost factory production, which saw sudden growth in October (16-month high of 8.2 per cent) after months of subdued growth or contraction.

The analysis said: “Uncertainty on account of disinvestment receipts and likely higher subsidy requirement make it a challenging task to adhere to the overall fiscal deficit target during 2012-13.”

The finance ministry said, while subsidies on food, fertiliser and petroleum would be higher than estimated, collections from corporation tax, excise and Customs duty might fall short of the Budget target. It admitted the disinvestment target of Rs 30,000 crore was difficult to meet and the proceeds from 2G spectrum auction could be much lower than the estimated Rs 40,000 crore. This financial year so far, the government has been able to raise only about Rs 7,000 crore from disinvestment.

In the Union Budget, presented in March, the government had estimated its fiscal deficit to be at 5.1 per cent of GDP. In October, Finance Minister P Chidambaram gave a revised road map and said it would be 5.3 per cent this year and 4.8 per cent in 2013-14 — to be further narrowed to three per cent by 2016-17.

Rajan said the target had been kept at 5.3 per cent, despite a likely shortfall in revenue collections, as the government expected to make up for the loss under other heads. The government expected its measures to rationalise expenditure to partially offset the higher-than-budgeted outgo on subsidies and the slippage in non-debt receipts.

“If there is a shortfall under one head, we will have to make up for it elsewhere. Hopefully, the pace of disinvestment will pick up now… All expenditure heads will be examined to achieve the deficit target, plan as well as non-plan,” he said.

The analysis said the targets might get exceeded on income tax and services tax, but excise and Customs duty collections would get affected by slower growth, a global economic slowdown and fluctuations in exchange rates. It said RBI’s high policy rates to contain inflation had affected corporate profitability and, thereby, corporation tax mop-up. It, however, said the overall slippage would be minimal.

Net direct tax collections during the April-November period this financial year grew 15 per cent over the period last year to Rs 2.7 lakh crore — less than half the Budget target of Rs 5.7 lakh crore. Indirect tax collection grew 17 per cent to Rs 2.6 lakh crore in the April-October period, against the annual growth target of 27 per cent.

Rajan attributed slippages in revenue collections to the stressed macroeconomic environment.

“Corporate profit earnings are not growing at the pace it had been growing at earlier. We hope it will start picking up once again; that should add buoyancy. (If) people are not making money as much as they were, it is clearly going to impinge on that kind of revenue,” he said.

He, however, said the economic growth had bottomed out. The economy grew 5.4 per cent in the first half of this financial year and the analysis expected it to be 5.7-5.9 per cent in the entire 2012-13.