Fiscal Target at Risk-DBS Group

As flagged earlier, India's divestment target this year, at 695 billion Indian rupees (0.6% of GDP) was ambitious. Press reports cited the divestment department suggesting that the target should be halved. This does not come as a surprise given the unimpressive past track record, whereby less than half of the targets were met and the bulk of funds being raised late in the respective fiscal years.

Progress on the divestment front has been slow in the first half of the fiscal year (April to September). Total proceeds amounted to less than a fifth of the annual target (30% of public sector asset sales target), with only two quarters of the fiscal year left. Earlier indications of a new strategy to regularise asset sales proved to be a challenge given the volatility in the financial markets and free-fall in commodity prices. Another big-ticket deal in the pipeline is a 5-10% stake sale in the country's largest coal mining company. A 10% stake-sale can single-handedly meet half the annual target, although indications are that this sale might get delayed to the next fiscal year

A potentially lower divestment target and anticipated shortfall in tax collections (0.3% of GDP) put the 2015/16 fiscal deficit goal of 3.9% of GDP at risk. Added to the mix is the April to August fiscal deficit, which already stands at 67% of the budgeted target. September numbers are due this week, with the one-off fiscal surplus in August likely to reverse out. Wage increases for government employees, pension schemes and higher capitalisation needs for public sector banks also pile on additional pressure. These needs will constrain the headroom to step-up capital spending in the coming months.

Despite these pressures, fiscal targets are unlikely to be breached though quality of fiscal consolidation will underwhelm. Tax collections lag estimates but non-tax revenues were up a strong 36% on-year between April and August. These collections were also buoyed by a record jump in the central bank's surplus transfers to the government, up 22% from year before. Dividends from state-owned companies are also expected to add to this kitty along with spectrum inflows. Finally, given the government's emphasis on fiscal consolidation, risks of overshooting targets will be mitigated by expenditure cuts to stay within the 3.9% of GDP red line.

In the longer term, structural improvements are required to bring fiscal balances onto a stable footing. Raising tax revenues from around 10% of GDP is a priority, by expanding the tax base and tightening collections. The passage of the nationwide goods and services tax at the winter parliamentary session is also being watched with interest. Meanwhile, the expenditure commission headed by former Reserve Bank of India Governor Bimal Jalan is also due to table its recommendations by year-end, and is widely expected to help streamline expenditure and lower non-energy subsidies in the coming years. This will help the government stay on track on its medium-term roadmap and narrow the deficit to 3% of GDP by March 2018.

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