FM's record doesn't inspire hope on deficit target: Economists

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Economists at global rating agencies and fund houses have described the 5.1-per cent fiscal deficit target as an uphill task and devoid of clear roadmap, adding that track-record of the Finance Minister last year, coupled with still uncertain global environment, does not make the number seem tenable.

They also said the deficit target will most likely overshoot by 20-40 bps to 5.3-5.5 per cent, as the projected revenue increase and subsidy cuts may not materialise.

"We do expect some fiscal slippages relative to the budget target, with the final figure possibly slipping to around 5.3-.5.5 per cent of GDP," said HSBC chief economist for India Leif Eskesen, though he described the Budget as 'more realistic, and low on ambition'.

Eskesen said fiscal slippages are likely to come from non-tax revenues and subsidies front, and increasing indirect taxes, divestment target and spectrum receipts and cutting subsidies will not be sufficient.

He admitted that Budget reflects the tight-rope FM has to walk due to economic and political realities. The fiscal policy has to help RBI contain inflation and bring public finances back onto a sustainable path to allow the government to regain fiscal credibility after this year's significant slippage, he said.

The problem arises, according to him, from the fact that though the Budget moved the deficit in the right direction, the implied fiscal consolidation is relatively moderate, apart from being not serious on structural reforms.

He also said subsidy bill may also be difficult to achieve if oil prices remain high and inflation proves sticky.

Leading global rating agency Standard & Poor's also said the uncertainty regarding policy implementation will keep the deficit high next fiscal despite reforms.

"While the FM announced various fiscal reforms, the timing of the implementation of key reform measures such as GST, DTC, and targeted direct subsidy remains uncertain. Also, deficit is likely to remain high,as uncertainty surrounds the path to subsidy consolidation and to lowering the fiscal vulnerability to volatile commodity prices," it said.

However, it believes nominal GDP growth will exceed the ratio of government deficits to GDP next fiscal.

"We expect debt-to-GDP ratio to fall to 74.7 per cent in FY13, from 74.9 per cent in FY12. But large public funding programmes, with new market borrowing of Rs 4.8 trillion, will put some pressure on financial markets, adversely affecting recovery.

"With the 2014 general elections, we believe the chances of achieving a deficit target of 3 percent for fiscals 14 and 15 seem remote," S&P said.

Citi India economist Rohini Malkani said the Budget is safe economically as well as politically, but lacks on the reform front that the market has been hoping for.

"We see slippages on revenue and expenditure fronts. The revenue numbers are dependent on growth sustaining and the markets holding up. On the expenditure front, the slippage may stem from fuel subsidies," Malkani said. The bottomline is "FY13 deficit being missed by over 40 bps, to 5.5 per cent".

But Nomura India economist, Sonal Varma, said as the government has under-budgeted subsidies, there is sufficient in-built cushion to absorb this.

She pegged fiscal deficit at 5.2 per cent. While revenues look achievable, spending on subsidies will likely overshoot. However enough cushion has been built into overall spending to absorb this, she said.

Terming the stance of fiscal policy as contractionary, she said this should boost growth due to crowding in of private investment and by giving room to the RBI to cut rates.

On the other hand, Fitch Ratings said the subsidy cap of 2 per cent will be positive, which in turn can help arrest fiscal slippages.

Though public finances have been deteriorating and remain a key weakness in the 'BBB-' rating of the country, agency would retain the rating outlook as stable, Fitch Asia director Art Woo said.

Care Ratings managing director D.R. Dogra said achieving 5.1 per cent fiscal deficit target will be tough, given the tepid growth in the country as well outside.

Moreover, he said the Budget has not exactly put a leash on expenditure but has tried to rationalise subsidies on fertilizers and oil, though one needs to see if they do work out at the end of the day.

Dogra also said that, "financing fiscal deficit will be a challenge given that we can see industry also demanding credit as the economy gradually moves up. We would have been happy in case we had some mention on reforms which are in the way of growth, which have been avoided in the Budget."

Grant Thornton partner Amrita Mitra termed the tax hike as inflationary, and said the sum total of these proposals clearly indicated intention to simplify the complex indirect tax system and to move to more tax neutral GST regime.