Why India could miss fiscal deficit target for the current financial year

India is likely to miss its fiscal deficit target for the current financial year, despite receiving an additional dividend from the central bank, five government officials and advisers said, as tax collections have sunk amid a sharp slowdown.

With economic growth falling to a six-year low of 5% in the April-June quarter, the sources said the government could toward the end of 2019 be forced to raise the fiscal deficit target to 3.5% of GDP from 3.3%, amid pressure for additional stimulus measures.

The officials asked not to be identified as they have not been authorized to discuss the matter with media.

A Finance Ministry spokesman did not immediately respond to requests for comment.

Tax collections could fall by as much as 1 trillion rupees ($14 billion), or 4% of $344 billion annual target, two of the officials said, noting that sharp shortfalls are expected both in goods and services tax (GST) and income tax collections.

"Overshooting the fiscal deficit target is inevitable this year as the economic slowdown has hit government revenue," a senior adviser said, adding the deficit would rise unless the government resorts to hefty spending cuts.

Separately, a finance ministry official said plans to sell minority stakes in some state-run entities including electricity producer NTPC, state insurer General Insurance Corp and construction finance company HUDCO could be deferred, as market sentiment has weakened.

Two government advisers said they have also urged the Prime Minister Narendra Modi-led government to defer the fiscal target to tackle the economic slowdown and outline stimulus steps to help the hard hit sectors such as autos and textiles.

DOWNWARD REVISIONS

Private economists have revised growth forecasts to as low as 5.8% for 2019/20, one percentage point lower than the prior year, saying the slowdown could persist for two or three years while much needed cyclical as well as structural reforms are put in place.

The flat manufacturing sector growth of 0.6% during the April-June period, and contraction in the auto sector by nearly 30% in July, has hit GST and corporate tax collections, while consumer spending cuts amid job losses have dented revenue collections.

So far, the government has resisted pressure to announce a big bang stimulus package while nudging the central bank to cut its benchmark repo rate , which is already down 110 basis points since February.

Another government adviser said despite receiving a bonanza of around $8 billion in extra dividends from the central bank, the fiscal deficit would rise as nominal GDP growth has fallen well below the budgeted estimate for the fiscal year.

Policy advisers fear that the government's recently outlined plan to merge 10 state-run banks into four mega banks this year, could also prove to be a distraction for bankers, reducing their focus on credit growth, delaying recoveries on bad loans, and in turn impacting their profits and their dividend payouts to the government.

In 2018/19, government revenue receipts fell 11% against the budgeted target, and the government resorted to spending cuts of 1.46 trillion rupees ($20.42 billion), and the deficit rose 3.4% of GDP against initial target of 3.3%.