• January 1, 2014, 3:52 PM

New Year’s Jeers for India’s Finance Minister

 

 

 

India532832.BY +5.72%n Finance Minister P. Chidambaram had little reason to party on New Year’s eve as the latest data suggested he will struggle to live up to his resolution for a lower fiscal deficit this year.

Government data released Tuesday showed India’s deficit has already reached close to 94% of the full-year target of 5.42 trillion rupees—or 4.8% of gross domestic product–just eight months into the fiscal year that ends in March.
 
A breach of the target could prompt rating agencies to downgrade India’s debt to junk, a stigma Asia’s third largest economy must avoid if it hopes to emerge from a prolonged and painful slowdown.

Mr. Chidambaram has repeatedly sought to assure markets and investors the target of 4.8% is a “red line” which would not be breached.

But the data are making it hard for economists to believe.
“Indeed we estimate fiscal deficit to be higher at 5.1% to 5.5% of GDP depending on the government’s control over expenditure, disinvestment and telecom auction proceeds,” Morgan Stanley saMS +1.65%id in a note.

India’s economy has been growing less than 5.0% in recent quarters, about half the pace it was witnessing as recently as in 2011. Morgan Stanley said the slowdown has made it challenging for India to achieve its tax as well as non-tax revenue targets.
 
The Reserve Bank of India also flagged India’s weak fiscal position as a problem this week.

In a report on financial stability released Monday, the central bank said risks to the economy due to the withdrawal of easy money policies in the U.S. have fallen. “However macro-economic adjustment is far from complete,” as weak growth, high inflation and a high fiscal deficit hurt the economy, the report said.

Tax collections from India Inc. have come under pressure as profits have been squeezed. The government’s efforts to generate revenue from non-tax sources such as sale of telecom bandwidth and stakes in state-run companies have also made slow progress.

India is hoping to generate 400 billion rupees each from the sale of bandwidth and state-owned company shares. The telecom auction isn’t expected to take place until February, just a month before the financial year closes. Meanwhile the government has so far managed to raise less than 30 billion rupees from government stock sales, and has little time left to carry out the remaining stake sales.
 
“With lagging revenue collections and firm expenditure, the government is likely to struggle,” said Bansi Madhavani and Priyanka Sachdeva, analysts at STCI Primary Dealer. 

“The fiscal scenario for the remainder of this financial year appears gloomy and the road ahead is likely to pose tough challenges.”


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