Indians are conservative when it comes to spending as they are taught to save money conventionally. But at national level, India finds it difficult to manage its income and expenditure. The Indian Government often struggles to keep its expenses under check. Growth in the income of the Government is limited and there are many claims on the revenue as the Government has to achieve a number of socio-economic objectives. The shortfall in the revenue of the Government over its expenditure is called fiscal deficit. At present it is mounting. At 2.98 lakh crore, the fiscal deficit has touched 56.1% of its full year target for 2014-15 in the first quarter itself.

The outgoing Finance Minister Mr P. Chidambaram had used accounting tactics to contain fiscal deficit number for the fiscal year 2013-14. Oil subsidies nearly worth Rs 35,000 crore were deferred and passed on to the next Government. Moreover, in the interim budget this February, he also proposed to lower the fiscal deficit to 4.1% in the financial year 2014-15. When BJP led NDA took over from UPA II, it was believed that, the new Finance Minister, Mr. Arun Jaitley may revise the fiscal deficit target upwards.

Now, although the NDA Government was not bound by the fiscal consolidation roadmap unveiled by the UPA Government in 2012, Mr. Jaitley has reaffirmed the fiscal deficit target of 4.1% of GDP. You see, independent rating agencies are closely watching the progress on ground as there have been talks of downgrades on sovereign rating of India. So, it remains to be seen whether India can manage to achieve ambitious fiscal deficit target.
 

Fiscal deficit woes: receipts lag expenditure

Actual figures are for the April-June quarter of 2014-15
Receipts include tax receipts, non-tax revenues and non-debt capital receipts
Expenditure include plan and non-plan expenditures
(Source: Business Standard; PersonalFN Research)  

As depicted in the graph, actual expenditure has exceeded the actual receipts by around Rs 2.98 lakh crore, which comes to be around 56.1% of the full year target. During the last financial year while the UPA Government was in power, the fiscal deficit had come in at 48.4% of budget estimates during the first quarter of 2013-14. This suggests the fiscal position has become even more difficult now than what it was last financial year. Having said this, it is noteworthy that, the non-plan expenditure has gone down in the April-June quarter of 2014-15, while the plan expenditure has gone up; which suggest that we could expect some turnaround in languishing economic growth rate. Moreover, we need to see how revenue streams along with the expenditures flow in the ensuing quarters of the fiscal year. Generally, it is in second-half of a respective fiscal year that revenues tend to flow from avenues such as disinvestments, tax collections and dividends; which aid in bridging the fiscal deficit gap.

But it won’t be an easy task for the Government to walk the talk on managing fiscal deficit, although there seems a commitment to walk tight on the path of fiscal consolidation. The Government has set ambitious targets for tax revenues and disinvestments. Against that, the subsidies have not witnessed any dip. Nonetheless, the Government has been trying to follow focused approach to expenditure planning. For example, there has been a massive reduction in Centrally Sponsored Schemes (CSS) from 126 to 66.

PersonalFN is of the view that in the aforesaid backdrop, rating agencies would be keep a close watch on the fiscal deficit situation and take a note of actions of Government to contain the deficit. Likewise, they would also take cognisance of the other macroeconomic variables and policy announcements in time to come. The bond yields may react positively whenever there is a sense that fiscal deficit data would be more or less in line with budget estimates. On the contrary, any derailment in this data or any other unfavourable macroeconomic variable may push bond yields upwards. PersonalFN is of the view that, those investing in debt funds should not speculate and invest only after giving due consideration to their risk appetite and time horizon. PersonalFN recommends its investors not to invest more than 20% of their debt portfolio in long term debt funds.

Add Comments

Comments
scmantri@gmail.com Aug 04, 2014 yes....India can  MATCH much more to    its ambitious fiscal deficit target by just revisiting / recovering the NPA of BANKS ,pending arrieros / demand of all types of central /states Taxes & Royalties from privet sectors leave apart the BLACK MONEY in side /outside the Nation.....but than most of Neta /Babus /Babas / Businessmen will be on ROAD.....begging for two sq. meal as at present most of AAM JANATA IS DOING
parimalshah1@gmail.com Aug 05, 2014 In my opinion the rating agencies are grossly biased and have their own agenda directed by select powers. Had it not been for the international currency status of the US dollar, the greenback would have been worth very little by now if one were to judge by fiscal deficit and total debt. The rating of sovereign by the agencies is only good for business channels to keep audience busy arguing about hypothetical issues.

 1