Economy
India’s fiscal deficit to be higher than budget estimates, says Morgan Stanley

A Morgan Stanley Research report warns that slow economic growth along with continued acceleration in government spending will lead to an increase in the fiscal deficit against the government’s budget estimate

 
A Morgan Stanley Research report anticipates that the FY13 fiscal deficit will be higher than the budget estimates. It warns that slow economic growth along with continued acceleration in government spending will lead to an increase in the fiscal deficit versus the government’s budget estimate. It expects the central government fiscal deficit to be at 6.1% of gross domestic product (GDP) in FY13 versus the budget estimate of 5.1%. The report expects the consolidated national fiscal deficit (including off-budget expenditure) to be 8.9% in F2013 compared with 9% in FY12.
 
The report adds that the persistently high international oil prices and the government’s inability to increase domestic fuel prices are resulting in a much higher than budgeted oil subsidy burden for the government as well as government-owned oil companies. The oil subsidy, the fertiliser subsidy and the defence bill are the biggest factors in expenditure growth leading to the uncontrollable fiscal deficit. There is little help from the revenues side as weakening economic activity will keep revenues from corporate income tax and indirect tax (excise and customs) weak in FY13.
 
The Morgan Stanley report has the figures to back its conclusion. 
 
Tax revenue growth at budget estimate levels in April-July period: The central government's aggregate gross tax collections growth decelerated to 21% y-o-y (year-on-year) in April-July from 25% y-o-y in April-June. However, it is still in line with the budget estimate (BE) of gross tax revenue growth of 21% in FY13. Similarly, growth in net tax collections (after transfer of share of state governments) decelerated to 25.2% y-o-y in April-July (versus 32.8% in April-May). This is higher than the budget estimate growth of 22%.
 
The deceleration in April to July versus April-June mainly reflected the fall of corporate tax collections in July (-22.9% y-o-y). 
 
Within direct tax collections, on a FYTD basis, growth for both personal tax and corporate tax collections decelerated but remained robust, well above budget estimates. Personal tax collections grew by 34% y-o-y in April-July versus 40.2% y-o-y in April-June; corporate tax collection grew by 34.2% y-o-y in April-July versus 53% in April-June. Budget estimate growth is 18% y-o-y for personal taxes and 15% y-o-y for corporate taxes in FY13. 
 
As for indirect tax collections, growth in excise duty collections improved slightly to 8.3% y-o-y in April-July (versus 8% in April-June) while customs duty collection growth picked up to 3.3% y-o-y (versus -1.2% in April-June). Both excise and custom duty collections are lagging the budget estimate growth targets of 34% and 25%, respectively. “We expect that weakening economic activity will keep revenues from corporate income tax and indirect tax (excise and customs) weak in FY13,” Morgan Stanley said in its report.
 
Non-tax revenue growth was below budget estimate in April-July: Total non-tax revenue growth decelerated to 12.8% y-o-y in April-July vs. 16.3% in April-June 2012. This is lower than the budget estimate of 32.4% for FY13. Total revenue receipts growth decelerated to 23.1% y-o-y in April-July versus 30.6% in Apr-June owing to slower growth in both tax and non-tax revenues. Total revenue receipts collections growth slipped below the budget estimate target of 24% y-o-y for FY13. 
 
Expenditure growth remained above budget estimate: Total expenditure growth decelerated to 16.6% y-o-y in Apr-July from 19.3% in Apr-June 2012 but remained above the budget estimate target of 14.8% y-o-y for FY13. Revenue expenditure growth stood at 15.5% y-o-y on a FYTD basis compared to BE of 12.7% y-o-y while capital expenditure growth was 24.7% y-o-y compared to BE of 30% y-o-y. According to the details available for total expenditure growth, interest payments grew by 19% in April-July and accounted for 25% of total non-plan expenditure. Further, expenditure of the Department of Fertilizers (68% y-o-y), ministry of petroleum and natural gas (38%), ministry of rural development (19%) and ministry of defence (17%) grew substantially y-o-y in April-July.
 
FYTD fiscal deficit at 51.5% of BE: On a FYTD basis, fiscal deficit was at 51.5% of BE compared with 37.1% in April-June 2012. The fiscal deficit in April-July grew by 15.6% y-o-y versus budget estimate of 0.8% for F2013. On an FYTD annualized basis, the fiscal deficit widened to 8.6% of GDP in the April-July period from 8.4% in the April-June period. The revenue deficit too grew by 10.2% y-o-y versus budget estimate of -8.9% y-o-y. 
 

User

India’s manufacturing growth eases to 9-month low in Aug

The poor showing by the manufacturing sector has pulled down the GDP growth to 5.5% in the first quarter of this fiscal

 
New Delhi: India’s manufacturing sector witnessed the weakest growth rate in nine months in August because of shrinking export orders and disruptions caused by power failures, an HSBC survey said, reports PTI.
 
The HSBC India Manufacturing Purchasing Managers’ Index (PMI), a measure of factory production, eased to 52.8 in August, from 52.9 in July. The index, however, has remained above the 50 mark below which it indicates contraction for more than three years now.
 
Electricity outages across India in August caused disruption in production as factories went without power for hours on end. It also led to rise in work backlog.
 
“The momentum in the manufacturing sector eased further on the back of weak external demand and output disruptions caused by the major power failures in early August,” HSBC chief economist for India & ASEAN Leif Eskesen said, adding, “power failures also partly contributed to a rise in backlogs of work.”
 
On one hand, power cuts continued to hamper production and on the other, export orders witnessed the second consecutive monthly dip because of “weaker international demand and unfavourable exchange rate conditions”, HSBC said.
 
Besides, while input price rose at a slightly slower pace, output inflation picked up due to higher import costs and taxes.
 
“With the slowdown partly supply-driven and inflation risks still lingering, these numbers underscore that the room for policy rate cuts is very limited at the moment,” Mr Eskesen said.
 
In its last quarterly monetary policy review, the Reserve Bank of India (RBI) left key interest rates unchanged amid fears of a deficient monsoon and high inflation.
 
RBI also lowered the economic growth projection for the current fiscal to 6.5% from its earlier estimate of 7.3%, stating that the rising government expenditure poses risks to economic stability.
 
Besides, the RBI raised inflation forecast for the fiscal ending March 2013 to 7% from the earlier projection of 6.5%.
 
Meanwhile, according to official data, the poor showing by the manufacturing sector has pulled down the GDP growth to 5.5% in the first quarter of this fiscal.
 
The growth rate in the April-June quarter, according to the data released by the government last Friday, slipped to 5.5% from 8% in the same period last fiscal on account of flat growth in manufacturing and quarrying sectors.
 

User

Risk of a slower GDP growth with little control on fiscal deficit, says Morgan Stanley

Government inaction could entail further deceleration in GDP growth to 4.3% in FY13, sharper depreciation of the exchange rate and a shock to the banking system by March 2014, says Morgan Stanley  

 
Morgan Stanley Research has painted a weak picture of the Indian economy, with slower GDP (gross domestic product) growth and has advised caution on the part of the government in both monetary and fiscal policy. The report in its base case scenario (50% probability) says, “We are cutting our 2012 GDP growth estimates further to 5% from 5.7%. On a fiscal year basis, we have cut the FY13 GDP growth from 5.8% to 5.1% (a 10-year low). We believe that GDP growth for the next two quarters will be sub-5% as weak monsoons and the slowdown in external demand hamper growth.”
 
While in the base case scenario the advice to the government is on caution, there is a clear warning in the bear case scenario (35% probability). The report says that there is a risk of an even deeper growth shock. The report continues, “In the event of continued inaction from the government, we see very high risk of a potential “deeper macro stress” scenario. That could entail further significant deceleration in GDP growth to 4.3% in FY13, sharper depreciation of the exchange rate and a shock to the banking system by March 2014.”
 
The Morgan Stanley report adds that there is an urgent need for policy action from the government to address the deterioration in the fiscal deficit and persistent pullback in private investment.
 
The report justifies the lower growth forecast by saying that part of the cut in its FY13 estimate reflects the adverse impact of poor weather (lower-than-normal rainfall) on summer crop output, which typically accounts for about 7.5% of GDP. The other factors driving the reduction in the forecasts are:
(a) persistent bad growth mix (high fiscal deficit plus strong rural wage growth and simultaneous decline in private investment). This has brought a stagflation-type environment.
b) Renewed weakness in the external environment, as reflected in sharp deceleration in export growth.
 
From the government’s side, the report says that the most important action required is that the fiscal deficit needs to be contained. The report says, “We expect the national fiscal deficit to remain elevated at 8.9% of GDP in FY13. The high fiscal deficit has been a key factor behind high inflation and cost of capital. It has led to a multi-fold increase in government borrowing since the credit crisis. But for the RBI’s (Reserve Bank of India) aggressive open market operations, 10-year government bond yields would have been much higher than the current 8.23%.”
 
Finally, the Morgan Stanley report warns that private investment is maintaining a downward trend even if you are an optimist on GDP growth. The analysts believe that a decline in investment to GDP has been the main reason for taking the potential growth trend growth lower for India. Private investment, the most productive component of total investment, has fallen sharply as a portion of GDP from its peak in FY08 to FY12. Moreover, the current macro environment is very discouraging for entrepreneurs.
 
While FIIs (foreign institutional investors) are exercising caution on emerging markets like India, the report warns that from the domestic entrepreneurs’ perspective, several factors are affecting corporate confidence such as:
(a) The slowdown in domestic demand growth;
(b) The weak global economy and slowing export growth;
(c ) Weak global capital markets;
(d)  Relatively high energy prices, inflation and cost of capital;
(e) Corruption-related investigations and slowdown in execution of the government’s administrative machinery.
 
The report expects the capex cycle to remain weaker for a longer period.
 

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)