Taking only painkillers without going to the root cause of the ailment is nothing but fooling your own self for temporary relief from pain. What if government does so? Recently, the finance ministry has decided to purposefully delay the payment of income tax refund. This comes as a move to contain fiscal deficit at 4.8% in the Financial Year (FY 2013-14). Moreover, the government is mulling over using the budget of the next fiscal to foot the oil subsidy bill of the current year. This may make fiscal deficit number of the current fiscal looks better but would put strain on the budget next year.

From the beginning of the current fiscal there was a huge pressure on government finances. The budget announced for FY 2013-14 was the last full budget before Lok Sabha elections. As a part of its image building programme, the government loosened up its purse and unexpectedly pegged up the spending. The government was expected to spend about 16% more this fiscal. It also assumed huge revenue growth. However, on the contrary to expectation of 19% rise in direct tax income, revenue from direct taxes in the first 6 months of the current fiscal has been up only by 13%. On the other hand, the government utilised around 76% of the full year fiscal deficit target in first 6 months of FY14.

What went wrong?
Ignoring the economic lull and high consumer price inflation, the government remained highly optimistic about revenue growth which remained much softer than expected. On the contrary, it spent more on subsidies. The government, at the beginning of the financial year, had assumed that it was possible to contain oil subsidy at around Rs. 65,000 crore which is now expected to run well over Rs 1 lakh crore. In FY13 the oil subsidy was in the region of Rs 97, 000 crore. This suggest that there was an over estimation by the government of its capability to in rein in oil subsidy bill. Although falling rupee might have exacerbated the pressure; under estimation led the government set aggressive fiscal deficit target. Furthermore, higher subsidies on fertiliser, energy and food too resulted in higher subsidy bill. Disinvestment plans have also ran into doldrums reducing the avenues of the government to shore up income.

PersonalFN is of the view that delaying the payment of tax refunds is merely an accounting gimmick that the finance ministry is trying use to cover up flaws in its planning. Although the ministry has clarified that the tax refunds only amounting to large sums would be deferred; it would be totally unjust for those who honestly pay their tax dues. PersonalFN believes that even after retaining these tax refunds, the government would hardly do any better to contain fiscal deficit. The real cause of steep gap in finances has been unwarrantedly high expectations of revenues and aggressive targets set for containing of expenditure. Enrollment of populous welfare schemes targeted at wooing specific vote banks might have been the real culprits of high fiscal deficit.

PersonalFN believes that investors should closely monitor the performance of the government on the fiscal deficit front. Unpleasantly high fiscal deficit may intimidate investors. Bond yields may harden and equity markets may fall for higher than expected fiscal deficit in the current financial year. Moreover, eating into next year’s budget would dampen the market sentiment further.

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