FY15 GDP projections put stress on fiscal deficit target

The gross domestic product (GDP) growth projections for 2014-15, based on the gross value added (GVA) methodology, will put some pressure on Finance Minister Arun Jaitley's already ambitious fiscal deficit target of 4.1 per cent of GDP.

Data released by the Central Statistics Office on Monday projected the economy to grow 7.4 per cent, as compared with 6.9 per cent in 2013-14, and the 5.5-6 per cent projected for the current financial year under the old methodology.

However, at current prices, the GDP in absolute terms has been estimated at Rs 126.54 lakh-crore for 2014-15, slightly lower than Rs 128.8 lakh-crore that the finance ministry estimated in the last Budget. This means if the fiscal deficit target of 4.1 per cent of GDP is maintained, in absolute terms, the gap between total expenses and receipts will be down from Rs 5.31 lakh-crore to Rs 5.18 lakh-crore, thus reducing the fiscal breathing room for Jaitley and his team.

"This will put the fiscal deficit ratio under strain statistically. The fiscal deficit at 4.1 per cent would be Rs 5.18 lakh-crore instead of Rs 5.31 lakh- crore projected in the Budget," said Madan Sabnavis, chief economist with Care Ratings. Sabnavis added that in all likelihood, the target in percentage terms will be adhered to.

Aditi Nayar, senior economist at ICRA, said the reduction in GDP at current prices "would make the task of restricting the fiscal deficit at 4.1 per cent of GDP slightly more stringent".

What would make matters even tougher for the finance minister is the massive public sector spending by the government in the September-December quarter, as revealed by Monday's data.

The GVA in public administration, defence and other services was 20 per cent year over year for the three months ended December 31, at constant prices, compared with six per cent and 1.9 per cent in the previous two quarters.