Keeping fiscal deficit at 3.9% challenging: Deutsche Bank

Foreign brokerage Deutsche Bank today said there are a plenty of challenges in terms of maintaining the fiscal deficit at the targetted 3.9 per cent of GDP for this fiscal.
"Given the way the economy is shaping up, we think that keeping the fiscal deficit in line with the budget target of 3.9 per cent of GDP this fiscal year could face a number of challenges," it said in a note released days after the government data suggested that only 37.5 per cent of the budget target has been utilised in April-May, as against 48 per cent last year.
The challenges include a two percentage point downside risk to the 12.5 per cent growth projection in the nominal GDP growth, slow pace of pick-up in the direct tax mop up, fear of indirect taxes not achieving the targets and an ambitious divestment target of Rs 69,500 crore.

"If risk to revenue slippages increases during the course of the year, the government may yet again be compelled to go slow on the capex, thereby adversely impacting growth," the report warned.
It said another risk is in the form of the ability of the states to spend the money transferred by the Union, which has now increased to 42 per cent from the earlier 30 per cent.
"Past evidences show that many states have been unable to spend the entire capital expenditure allocation year after year, due to administrative incapability," it said, adding such an eventuality does not give the intended fillip to growth that has started looking up.

There is also a risk to fiscal deficit on the subsidy front as well if the monsoons are bad, it said, saying there will be pressure due to increased fertiliser and food subsidies.
It can be noted that fiscal deficit has been a key monitorable factor for investors and rating agencies. In the budget 2016, the government has departed from a roadmap and made more space to prop-up growth in opting for a 3.9 per cent deficit target.