Chidambaram's fiscal deficit estimate optimistic

Improvement driven by cutting spends, deferring subsidy payouts and assuming greater revenue

On the face of it, Finance Minister P Chidambaram’s interim Budget speech suggests he has tamed the runaway fiscal deficit by keeping it well within the red line (4.8 per cent of the gross domestic product) drawn by him last year. In fact, he has managed to better his own estimate by containing it at 4.6 per cent of the GDP. This should ideally have impressed the Street but it hasn’t, as the improvement isn’t structural.

If at all the finance minister achieves the fiscal deficit target, it will be by cutting spends by Rs 75,000 crore, deferring of subsidy payouts and assuming higher revenue receipts in the fourth quarter of FY14. For the past two years, the government has been ‘managing’ the fiscal deficit through such means, which suggests the improvement is sub-optimal. Dhananjay Sinha, head of institutional research at Emkay Global, says the quality of fiscal consolidation is not satisfactory as the government has assumed a massive 24 per cent year-on-year (y-o-y) rise in net tax collections for the fourth quarter of FY14, which, compared with the growth of 6.9 per cent in the first nine months, is optimistic.

A segment of economists believes spending cuts are growth-neutral. Of the Rs 38,000 crore that is being cut back on capital expenditure, only about Rs 16,000 crore would be cutback of productive capital expenditure. Also, as far as spillover of subsidies is concerned, a section of economists claim that this year will see the spillover of subsidy payments decline compared to last year. Aditi Nayar, senior economist at ICRA, says: “If one puts aside the neutral capital spending cuts, the drawback of productive capital would be Rs 16,500 crore. We believe that the net tax revenue estimates are optimistic and could fall short by around Rs 12,000 crore, which could push up the actual fiscal deficit close to the original 4.8 per cent target.”

While the FM’s FY14 assumptions can be called optimistic, they are downright aggressive for FY15. Chidambaram has estimated revenue growth at 18 per cent, GDP growth at six per cent and fiscal deficit at 4.1 per cent of the GDP. The market has dismissed these projections as optimistic. Nomura's India economist Sonal Varma says: “The question is whether the 4.1 per cent fiscal deficit number is credible. We believe that the government’s revenue projections — both on asset sales and on tax revenues — look very optimistic. We expect GDP growth at five per cent y-o-y in FY15 due to the ongoing fiscal and monetary policy tightening.”